Court Opinion

ID: 4591958
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:06:56.215261+00
Date Added: 2024-06-11T07:50:46.637001
License: Public Domain

RANDS, INCORPORATED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Rands, Inc. v. CommissionerDocket No. 74942.United States Board of Tax Appeals34 B.T.A. 1094; 1936 BTA LEXIS 597; October 15, 1936, Promulgated *597  1.  A corporation, substantially all the shares of which were owned by an individual, to which he had contributed large amounts of securities for shares and to which he made large loans without interest, which traded in securities at profit, and which made no distributions, held, notwithstanding a diminution in 1929 and 1930 in the value of its securities, to have been formed and availed of for the purpose of enabling its shareholders to escape surtax, etc., and subject in 1927, 1928, 1929, and 1930 to the 50 percent tax provided by section 220, Revenue Act of 1926, and section 104, Revenue Act of 1928.  2.  Securities redeemed in 1927 and 1929 were derived, through several intermediate transactions, from an exchange in 1916 for shares which were acquired before March 1, 1913.  Held, for the purpose of computing gain in 1927 and 1929, that the exchange in 1916 was in a transaction described as a reorganization in section 203(f), Revenue Act of 1926, and that the basis is value on March 1, 1913, which was higher than prior cost and higher than value in 1916.  3.  A corporation, substantially all the shares of which were owned by an individual, purported for income tax purposes*598  to sell securities to him at market prices in consideration for the reduction of its indebtedness to him, the securities having for convenience been held in his indiviudal name.  Held, the sales were actual and resulted in deductible losses.  Raymond H. Berry, Esq., Ralph W. Barbier, Esq., and Thomas O. Marlar, Esq., for the petitioner.  DeWitt M. Evans, Esq., and Leonard C. Mitchell, Esq., for the respondent.  STERNHAGEN *1094  The Commissioner determined deficiencies of $315,306.91, $475,025.87, $239,051.62, and $28,614.83 in petitioner's income taxes for 1927, 1928, 1929, and 1930, respectively.  1.  Petitioner assails the determination of a 50 percent tax under section 220, Revenue Act *1095  of 1926, and section 104, Revenue Act of 1928, that it was merely a holding or investment company, and that its accumulation of surplus was beyond the reasonable needs of its business.  2.  It contends that it is entitled to a March 1, 1913, basis in the computation of gain from the redemption of shares of stock and debentures having their origin in property received in the course of a corporate consolidation in 1916.  3.  It claims deduction*599  for losses on alleged sales of stock to its principal shareholder as an individual and as trustee.  Other issues are settled by stipulation.  FINDINGS OF FACT.  1.  Petitioner is a Michigan corporation, with principal office at Detroit.  It was organized on May 20, 1925, with an authorized capital stock of $1,000,000 divided into 10,000 shares of a par value of $100 each: To buy, sell, hold, mortgage, pledge and deal in real estate and personal property and to engage in all kinds of lawful business other than those mentioned in Section 8, Chapter 1, Part I, of Act No. 84 of the Michigan Public Acts of 1921.  It was formed by William C. Rands when his son was about to graduate from Yale, and provided an occupation for the son and for himself after two years of inactivity.  To the petitioner, he transferred stocks and bonds of a market value of $1,502,273.17 for 9,888 shares of its capital stock.  The assets transferred then represented about 30 percent of Rands' wealth, which was invested chiefly in securities, among them tax-exempt bonds of a value of $1,800,000.  Rands was president and principal shareholder; 70 shares were held by W. C. Rands, Jr., and a qualifying share*600  by another.  During 1925 Rands investigated a few properties for petitioner's prospective development, but at the close of that year petitioner's real estate was only $19,281.  At the close of 1926 its balance sheets showed real estate of $287,931.  There were some increases in the real estate account during 1927 and 1928, but at the close of 1929 and 1930 it had shrunk to $8,070.75.  There was a continuous decline in real estate values through 1927, 1928, and 1930.  Because of the slump in the real estate market, petitioner began in 1925 to buy and sell securities, without, however, abandoning the intention to engage in the real estate business in favorable market conditions.  In 1925 and 1926 it made substantial profits from buying and selling stock; during 1927 it averaged 50 purchases and 50 sales a day; during 1928 and 1929 its averages rose to between 75 and 80 a day; during 1930 there was a material decline in the number of transactions and volume of business.  There was a steady tendency during the four years to acquire relatively more speculative securities and relatively fewer stable securities.  *1096 Rands alone guided petitioner's policy, and he kept in close*601  touch with the stock market.  Purchases were made for resale at a profit, sometimes on margin, and sometimes with loans from Rands, personally or as trustee, and from banks and brokers.  Rands' loans were on open account and bore no interest.  Repayment was made sometimes by cash and sometimes by a transfer of petitioner's securities to Rands' safekeeping account at a bank.  The loans from Rands have not yet been entirely repaid.  Rands never borrowed from the petitioner.  Petitioner's securities were held in Rands' name.  This was to avoid the inconvenience of corporate resolutions.  The certificates were lodged in the safekeeping department of the First National Bank of Detroit, in an account kept in petitioner's name, and could be withdrawn only by written instructions of Rands.  Upon a sale, the safekeeping department delivered the certificates to the broker upon receipt of the broker's check made payable to petitioner; and upon a purchase, the broker delivered the certificates to the safekeeping department, which credited them to petitioner's account and gave Rands a receipt.  The broker executed the purchase or sale in petitioner's name, and made checks payable to it, although*602  the securities involved were in Rands' name.  In some instances petitioner discharged its indebtedness to Rands by a transfer of securities.  These transfers were effected by formal written instructions to the safekeeping department, and recognized by appropriate book entries and receipts.  Similarly, Rands sometimes sold stock of his own to petitioner.  Petitioner loaned money in substantial amounts on call with interest.  During 1927 petitioner's disbursements and receipts were each in excess of seven million dollars, during 1928 over sixteen million dollars, during 1929 over ten million dollars, and during 1930 about two million dollars.  These amounts include rents, interest on call money and real estate dealings, as well as stock trading.  Borrows for stocktrading operations were of the following amounts at the close of the years indicated: Lender192519261927W. C. Rands$256,667.29$79,988.65$159,407.57Rands, trustee2,500.00125,000.00Banks231,472.19Lender192819291930W. C. Rands$868,463.20$1,241,604.28$1,461,581.63Rands, trustee375.00481,785.36457,767.71Banks145,000.00100,000.00*603  Petitioner owed brokers and syndicates $217,486.77 at the close of 1928, $264,537.63 at the close of 1929, and $81,126.11 at the close of 1930.  *1097  On petitioner's opening balance sheet of May 20, 1925, the original contribution by Rands of securities amounting to $1,502,273.17 was accounted for as $988,800 par value of stock issued to Rands, and the excess value of $513,473.17 was accounted for as "difference" on the credit side.  In each later closing balance sheet, the value of assets appeared at the following figures, in excess of the aforesaid $1,502,273.17 (with a slight adjustment to reflect the issuance of the 71 shares held by Rands, Jr., and another); 1925, $142,687.83; 1926, $405,519.74; 1927, $729,599.68; 1928, $1,597,147.50; in 1929, instead of a figure of excess, there was a figure of reduction in such value of $367,170.03, and at the end of 1930 a reduction figure of $1,798,827.04.  In 1927, 1928, 1929, and 1930 no dividends were declared or paid by petitioner.  During all of the years in question, the petitioner was a holding or investment company.  It was formed and availed of for the purpose of preventing the imposition of the surtax upon its shareholders*604  through the medium of permitting its gains and profits to accumulate instead of being divided or distributed.  In 1927 and 1928 its gains and profits were permitted to accumulate beyond the reasonable needs of its business.  2.  Among the securities transferred by Rands to the petitioner upon its organization in 1925 and in consideration of the issuance of its stock to him were 5,265 shares of preferred stock and $390,000 face value of debenture notes of the Motor Products Corporation.  In 1927 petitioner received $390,000 in redemption of the notes, and in 1929 it received $157,920 in redemption of 2,632 of the preferred shares.  These notes and shares were some of an aggregate of $1,203,000 of debenture notes and 10,465 preferred and 10,465 common shares of Motor Products Corporation, which Rands had acquired on November 1, 1923, in exchange for 10,465 shares of stock in a predecessor corporation of the same name, owned by him individually or as trustee.  The exchange was a nontaxable transaction carried out in the course of a corporate reorganization.  Rands' ownership of the 10,465 shares in the earlier Motor Products Corporation resulted from various purchases and sales for*605  cash and an original acquisition of 5,948 shares, which were received, together with cash of $738,093.60, in exchange for his stock in the Rands Manufacturing Co., in the course of a consolidation of the latter and four other companies into the original Motor Products Corporation on May 1, 1916.  The Rands Manufacturing Co., known until 1905 as the Wheeler Manufacturing Co., was a Michigan corporation with an authorized capital of $25,000, engaged in the manufacture of bicycle accessories.  Rands and Stephen Hartnell, who as partners were engaged in the sale of bicycles, purchased it prior to 1900, and *1098  soon thereafter Rands acquired all of Hartnell's interest, and the company, of which he became president, began the manufacture of automobile parts and accessories.  During 1916 the Rands Manufacturing Co. and the four above mentioned other corporations, all engaged in a similar business, adopted and consummated a plan of consolidation into the Motor Products Corporation.  Pursuant thereto, one of the incorporators of the latter formally offered to procure the conveyance to it of the assets of the five consolidating corporations in consideration of the issuance of its*606  stock to him.  The offer was accepted, and its stock was issued and immediately exchanged with shareholders of the five consolidating corporations for their stock, which was immediately transferred to the Motor Products Corporation.  Thereupon the Motor Products Corporation formally took over all the assets of the consolidating corporations.  The cash and shares in the Motor Products Corporation which Rands received upon the consolidation for its shares in the Rands Manufacturing Co. were in the same proportion as the cash and shares received by the shareholders of all the consolidating companies for their contributions.  The aggregate value of the cash and shares received by him was $1,184,193.60, of which $738,093.60 was cash and $446,100 was the value of the shares.  The March 1, 1913, value of the shares in Rands Manufacturing Co. which he gave up was $1,669,597.97.  Rands claimed no loss deduction on his 1916 income tax return because of this transaction, since the original cost of the shares exchanged by him was not in excess of $25,000.  The parties are agreed that the cost basis to Rands of each $1,000 debenture note received upon the reorganization of 1923 and redeemed*607  in 1927 is $670.55851 if its basis should be related back to the March 1, 1913, value of Rands' shares in the Rands Manufacturing Co., and is $408.03 if its basis should be related back to the value of the Motor Products Corporation shares received in the consolidation of 1916.  The parties are agreed that the cost basis to Rands of each preferred share of Motor Products Corporation stock received in the reorganization of 1923 and redeemed in 1929 is $28.52965 if its basis should be related back to the March 1, 1913, value of Rands' shares in the Rands Manufacturing Co., and is $18.306 if its basis should be related back to the value of the Motor Products Corporation shares received in the consolidation of 1916.  3.  In addition to the account in which petitioner's securities were held, the safekeeping department of the First National Bank of Detroit also had three separate similar accounts in which securities of Rands personally and as trustee of two alleged trusts were kept, *1099  subject to the same conditions as those governing petitioner's account.  In all four accounts Rands was authorized to direct deliveries by the custodian, and the shares on deposit were registered*608  in his name.  The alleged trust accounts were set up by Rands after he had executed instruments October 17, 1923, for the benefit of his wife, Rose A. Rands, and of his son, W. C. Rands, Jr., respectively.  In each, Rands declares that he holds 2,500 shares of common stock in the Motor Products Corporation for the benefit of the named beneficiary to whom all dividends shall be made payable; that he retains the right to vote the stock; that he may sell and dispose of it, but in such case must purchase other first class securities for the trust; that the trust shall continue until the death of the beneficiary, when the corpus shall become a part of Rands' estate and be disposed of according to his will.  Rands, for himself and as alleged trustee for the two trusts, engaged in the purchase and sale of securities, but to a less extent than petitioner.  The records of transactions in the four accounts were kept by an accountant in petitioner's employ, in books compiled from original checks and invoices.  For each, there were separate records, separate accounts with brokers, and a separate bank account with the First National Bank of Detroit, on all of which Rands alone could draw.  Withdrawals*609  and deliveries of the respective securities on deposit with the bank's safekeeping department required Rands' written instructions and were accompanied by appropriate receipts for the respective accounts.  Securities purchased for any one of them by a broker were delivered to the safekeeping department for its account, and acknowledged by the department's receipt supplied to Rands.  Sales in any account through a broker were accompanied by Rands' instructions to the department to make delivery from shares covered by a specific receipt number in his office.  Dividends on shares owned by petitioner or the alleged trusts were made payable to Rands, were either deposited in the respective accounts, or, if deposited in Rands' individual account, were reflected by a credit entry in an open account carried in the ledger.  Transfers of shares from one account to another were made by Rands' written instructions to the safekeeping department.  Formal receipts were given and entries were made in a ledger as purchases and sales.  Corresponding entries were also made, crediting the transferor account in an amount adopted as the fair market price.  During 1929 Rands, acting as petitioner's president*610  and in petitioner's name, dictated letters to himself as an individual or as trustee, purporting or promising to deliver specified securities of the petitioner to the addressee.  These letters were accompanied by bills for the value of the shares, and in each instance entries were made *1100  in the ledger debiting the transferor account.  These entries are not in chronological order.  Transfers from the trust accounts appear in an account #85, styled "Accounts Payable", and from Rands, in an account #98, styled "W. C. Rands." The former account shows amounts owed by petitioner to various parties, including the two trust accounts, and the latter shows loans and other transactions with Rands.  Contra debits of even date, likewise out of chronological order, appear in the ledger record of petitioner's "Cash Disbursements." Petitioner sold the following shares under circumstances above described and sustained losses as follows: Nov. 14, 1929, 1,700 shares Motor Products Corporation, cost $135, 927.50500 shares to Rands200 shares to Rose Rands trust200 shares to W. C. Rands, Jr., trustSale price68,000.00Loss$67,927.50Dec. 14, 1929, 2,500 shares Amer. Super Power Corporation, cost149,200.00Sale to Rands65,000.00Loss84,200.00Dec. 12, 1929, 4,500 shares DeForest Radio Co., cost77,475.00Sale to Rands29,250.00Loss48,225.00Dec. 10, 1929, 1,040 shares Electric Shareholdings, Inc., cost65,050.00Sale to Rands19,760.00Loss45,290.00Dec. 11, 1929, 2,000 shares Yellow Truck & Coach Mfg. Co., cost75,837.50Sale to Rands32,000.00Loss43,837.50Total289,480.00*611  In addition to the above transactions, the books also show as of December 30, 1927, credits to Rands' account with petitioner of $45,000 for 1,000 shares of Commonwealth, $30,000 for 750 shares of General Motors, and $12,500 for "Long Stock Purchase." On the same date the "Cash Disbursements" account has the following entries: R.A.R. Trust (1,000 Commonwealth) - 45,000Accts. pay. 45,000W.C.R. (1,000 Commonwealth) 45,000W.C.R. 45,000W.C.R. 750 G.M. Commonwealth 30,000W.C.R. 30,000*1101  In his income tax return for 1929 Rands deducted $20,000 as a loss on the sale of 1,000 Commonwealth shares on December 30, 1929, and losses on aggregate sales of General Motors, not specified in detail.  At the time of the first entries of November 14, 1929, which followed an entry of December 4, Rands' account with the petitioner indicated a balance in his favor of $1,279,210.07, which indebtedness the share transfers served to satisfy in part.  At the same time the accounts indicated that the petitioner was also indebted to the alleged trusts.  The object in petitioner's transfer of the shares to Rands and the alleged trusts with resulting reduction of its indebtedness*612  to them was the deduction of losses on its income tax return.  Transfer tax stamps were not purchased for the above transfers until October 1935.  In determining petitioner's income tax for 1929 the Commissioner disallowed $289,480 claimed as loss deductions on the alleged sales of the above shares by petitioner.  The parties are agreed that if the transactions constituted sales, the amount of $289,480 is deductible as a loss.  OPINION.  STERNHAGEN: 1.  The Commissioner determined for each of the years 1927, 1928, 1929, and 1930: * * * that you have incurred liability under the provisions of section 220 of the Revenue Act of 1926 and section 104 of the Revenue Act of 1928. 1 The fact that your company is a mere holding or investment company and has permitted your gains and profits to accumulate beyond the reasonable needs of the business instead of being distributed, is construed as prima facie evidence of a purpose to prevent the imposition of the surtax upon your stockholders.  Accordingly, you are subject to a tax equal to 50 per cent of your net income as defined in section 220(d) of the Revenue Act of 1926 and section 104(c) of the Revenue Act of 1928.  *613  The petitioner assails this determination.  *1102  The general purpose and scope of the statutory provision have been considered in previous decisions, ; ; ; , affirming ; , and that ground need not be gone over again.  The existence of some or all of the conditions requiring the additional tax is a question of fact.  If from the evidence it appears that the facts set forth in subdivision (a) exist, the 50 percent tax is levied; and if the facts of subdivision (b) exist there is a presumption which supports the 50 percent tax unless overcome.  The essential question always is whether the corporation was formed or availed of to relieve the shareholders from surtax.  When the Commissioner determines a deficiency under this section of the statute, the taxpayer can only succeed by affirmatively*614  proving that this is not so.  In our opinion, the evidence supports the Commissioner's determination.  Although Rands testified categorically that in forming the corporation he had no thought of taxes, we find it impossible in view of the remaining evidence to let this oral testimony of the most interested witness control the judgment.  Cf. . Rands had accumulated a fortune, the income from which placed him in the high surtax brackets.  He would be more naive than he appeared to be on the witness stand if he were unmindful of his heavy taxes.  To provide an occupation for his son and to give himself something to do are not motives which necessarily compel the organization of a corporation and the transfer to it of securities worth $1,500,000, comprising one-third of his estate.  Such motives are not inconsistent with a tax-saving purpose.  But the statute is not dependent alone upon the purpose of the forming of the corporation, being equally applicable if the corporation after its formation is availed of for such purpose.  As to this, there can be little doubt.  To it, Rands, substantially its sole shareholder, transferred*615  large amounts of his personal funds each year as loans without interest.  If these amounts had been employed by Rands in normal use or investment they would have yielded to him substantial amounts of income taxable to him.  By lending these amounts to his controlled corporation without interest such income inured to the corporation and was taxable at the fixed corporation rate.  Because the corporation made no distribution, Rands escaped the surtax entirely.  This we should think was exactly the scheme which has ever since the Revenue Act of 1913 been aimed at by *1103  Congress.  And in this instance we think the statute has not missed the mark.  The petitioner's counsel, with ability, devote much of their evidence and argument to interesting questions as to the legal meaning of the terms of the section - "holding company", "investment company", "mere", "reasonable needs of the business." But this case is too patently within the obvious intendment of the statute to permit such dialectical treatment.  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*616  or "holder" of the funds or assets.  Cf. ;An investment company is not to be defined as one restricted to long term investments for regular income and excluding one which trades in the market and buys and sells speculative stocks or real estate.  The reasonable needs of the business are not to be regarded as controlled by the judgment of a stock trader, or even of a student of the market, as to the amount necessary to survive a sudden drop in the market or to take advantage of a rise.  If there is difficulty, as petitioner suggests, in formulating a concept for the reasonable needs of the business for such a corporation as this, it does not help the petitioner and does not require that a definition be made which will fit such corporations as a class.  Cf. ; ;;*617  (on review C.C.A., 9th Cir.);  (on review C.C.A., 9th Cir.); Here subdivision (b) needs no consideration at all, since it appears clearly enough that the crucial subdivision (a) is applicable.  This, in our opinion, is no less true as to 1929 and 1930 than as to 1927 and 1928, notwithstanding that the diminution in value of petitioner's asset securities wiped out surplus.  The corporation had taxable income, which but for its intervention would have been taxable to Rands, and it continued to be the instrumentality which enabled him to escape surtax.  ;The point is made that the provision is unconstitutional, but prior decisions have upheld it.  ;;*618 ;The Commissioner's determination that section 220 and section 104 are applicable is sustained.  2.  In 1927 petitioner received $390,000 in redemption of debenture notes of Motor Products Corporation and in 1929 it received *1104  $157,920 in redemption of some of the preferred shares of that corporation.  The controversy is as to how much of these amounts is taxable gain, and the parties are agreed that this question is narrowed down to whether the original basic figure to be used is the value of Motor Products Corporation shares in 1916, as the Commissioner has held, or of the Rands Manufacturing shares on March 1, 1913, as petitioner claims.  Both of these figures of value have been stipulated, and it must now be decided as a matter of law, which one should be used in the computation of gain.  It is not necessary, and would only be confusing, to restate the intermediate facts as to changes in organization between the consolidation of May 1916 when Rands, the individual, first received the old Motor Products shares, and 1925, when this petitioner acquired*619  the new Motor Products shares from Rands in a transaction which gave it his basis for gain or loss.  In other words, the problem is to be treated as if in the tax years 1927 and 1929 this petitioner had sold the old Motor Products shares, received in 1916 in exchange for the Rands Manufacturing Co. shares, which it had acquired before March 1, 1913, at a cost of $25,000, and which on that date were worth $1,669,597.97 and which in the consolidation of 1916 were exchanged for Motor Products shares and cash aggregating $1,184,193.60.  By the consolidation of 1916, the Rands Manufacturing shares were turned in for cash and property amounting in the aggregate ($1,184,193.60) to more than original pre-1913 cost ($25,000) and to less than March 1, 1913, value ($1,669,597.97).  There was, therefore, no deductible loss or taxable gain at that time.  ; ; ; . The determination of gain or loss in 1927 and 1929 is governed, as to the redemption of debentures in 1927, by the*620  provisions of the Revenue Act of 1926, and, as to the redemption of shares in 1929, by the Revenue Act of 1928.  The applicable provisions of both acts are identical and are projections of similar provisions of the Revenue Act of 1924.  Those of the 1926 Act are set forth in the margin. 2*1105  From them it will be seen that the consolidation of 1916 was what the 1926 Act called a reorganization, and that the exchange by Rands of his shares in Rands Manufacturing Co. for shares of the newly consolidated Motor Products Corporation was an exchange in a statutory reorganization whereby Rands received property and cash.  This is squarely within section 204(a)(6).  In other words, the Motor Products Corporation shares were acquired upon an exchange in a statutory reorganization.  Gain or loss was, under the statute in force at that time, as construed by the decisions of the Supreme Court, not properly to be recognized, and therefore the basis of the Motor Products shares thus received must, by section 204(a)(6), be taken as the same as the basis of the Rands Manufacturing Co. shares exchanged for them.  Colloquially speaking, there was not in 1916 what the Commissioner calls a "closed*621  transaction." Under these circumstances, the basis to be used antedates the consolidation of 1916 and becomes either the original cost of the Rands Manufacturing Co. stock or its March 1, 1913, value, whichever is higher, and this is the $1,669,597.97 stipulated as the value on March 1, 1913.  There is no substantial distinction between the problem in this proceeding and those considered in , and , and those decisions are authority to sustain the petitioner's contention and reverse the Commissioner's determination.  *622  3.  The petitioner assails the respondent's disallowance of a deduction of $289,480 as the aggregate of losses sustained upon the seven transactions set forth in the findings.  Explaining his disallowance, the respondent, in the notice of deficiency, said: On the return a loss of $289,480 was claimed on the transfer of several blocks of stock to Mr. W. C. Rands, Sr.  This loss has been disallowed on the ground that there was not an actual sale, as explained in the beginning of this statement.  The earlier explanatory statement is as follows: * * * There was no cash involved in these transfers and the entries on the books of the corporation consisted simply of debits to the account of Mr.  *1106  Rands and to losses on common stocks and credits to the assets transferred.  In view of the circumstances and inasmuch as Mr. Rands is the sole stockholder of the corporation, it is held that this transfer does not constitute an ordinary sale, and therefore the loss of $289,480 has been disallowed.  The evidence, in our opinion, establishes that in fact the sales, with the resulting losses, occurred, and findings to this effect have been made.  It follows as a matter of law*623  that the petitioner is entitled to the deduction claimed and that the Commissioner incorrectly disallowed it.  Although there is no dispute as to the facts in evidence, the respondent contends that the transactions can not be recognized as sales because of the following circumstances: They were actuated by a purpose to reduce income taxes, they were transactions between a "one man corporation and its sole stockholder", the certificates were at all times in the name of Rands, no Federal transfer tax was paid at the time or until several years later, and the transfers were not by actual delivery, but by mere bookkeeping entries.  In our opinion, none of these circumstances separately or collectively serves to prevent recognition of the sales.  The separate existence of Rands and the corporation must be respected not only as a general precept, ; , but because this is the only view which is consistent with the application of section 104 and the levy of the 50 percent tax upon the corporation.  It could not in the same determination be said that Rands had availed*624  himself of a corporation to save surtaxes, but that sales to the corporation are sham because it is his creature and may not be recognized.  While such a circumstance invites suspicion and requires strict adherence to the legal requisites of a sale, it does not vitiate a sale otherwise complete.  . So long as the taxpayer hews to the line, the sale must be respected.  If the corporation had reacquired the shares or had sold them at other than a fair price or had not taken the usual steps to account for the transfer either upon its own books or in the records of the safekeeping department of the bank, there would have been less foundation for the recognition of a sale than there was.  But these supporting circumstances are beyond dispute.  The purpose to save income taxes is now legally above reproach, and will not serve to stamp the transaction as other than a sale, ; This is likewise true of the circumstance that the shares were held in Rands' name.  This is not uncommon in respect of shares owned by a corporation where*625  trading on the market is frequent and corporate action is cumbersome and inconvenient.  The failure of the corporation to pay the transfer tax contemporaneously with the sales tends slightly to support the Commissioner's view, but can not be regarded as controlling *1107  or sufficient to weigh down the scale.  In view of the undisputed fact that Rands individually was a heavy creditor of the corporation, it is not significant that the consideration for the transfer was a credit against this indebtedness of which appropriate entries were within the year made upon the books of account,  (C.C.A., 6th Cir., dismissed June 30, 1936). , is cited by the respondent to support the nonrecognition of the sale.  In that case, however, there were circumstances including the reacquisition of the shares by the taxpayer which demonstrated the unreality of the sale and of the taxpayer's alleged intent to dispose of the property.  The respondent's disallowance of the deduction is reversed.  Reviewed by the Board.  Judgment will be entered under Rule 50.BLACK concurs*626  only in the result.  VAN FOSSAN VAN FOSSAN, dissenting: In my opinion the record in this case does not support a finding that petitioner corporation was either formed or availed of for the purpose of preventing the imposition of the surtax on the stockholders.  For this reason I dissent from the majority conclusion as to this issue.  Footnotes1. SEC. 104.  ACCUMULATION OF SURPLUS TO EVADE SURTAXES.  (a) If any corporation however created or organized, is formed or availed of for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting its gains and profits to accumulate instead of being divided or distributed, there shall be levied collected, and paid for each taxable year upon the net income of such corporation a tax equal to 50 per centum of the amount thereof, which shall be in addition to the tax imposed by section 13 and shall be computed, collected, and paid upon the same basis and in the same manner and subject to the same provisions of law, including penalties, as that tax.  (b) The fact that any corporation is a mere holding or investment company, or that the gains or profits are permitted to accumulate beyond the reasonable needs of the business, shall be prima facie evidence of a purpose to escape the surtax.  (c) As used in this section the term "net income" means the net income as defined in section 21, increased by the sum of the amount of the dividend deduction allowed under section 23(p) and the amount of the interest on obligations of the United States issued after September 1, 1917, which would be subject to tax in whole or in the hands of an individual owner. ↩2. SEC. 204. (a) The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that - * * * (6) If the property was acquired upon an exchange described in subdivision (b), (d), (e), or (f) of section 203, the basis shall be the same as in the case of the property exchanged, decreased in the amount of any money received by the taxpayer and increased in the amount of gain or decreased in the amount of loss to the taxpayer that was recognized upon such exchange under the law applicable to the year in which the exchange was made.  If the property so acquired consisted in part of the type of property permitted by paragraph (1), (2), (3), or (4) of subdivision (b) of section 203 to be received without the recognition of gain or loss, and in part of other property, the basis provided in this paragraph shall be allocated between the properties (other than money) received, and for the purpose of the allocation there shall be assigned to such other property an amount equivalent to its fair market value at the date of the exchange.  This paragraph shall not apply to property acquired by a corporation by the issuance of its stock or securities as the consideration in whole or in part for the transfer of the property to it; * * * SEC. 203. (b)(2) No gain or loss shall be recognized if stock of securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.  * * * (f) If an exchange would be within the provisions of paragraph (1), (2), (3), or (4) of subdivision (b) if it were not for the fact that the property received in exchange consists not only of property permitted by such paragraph to be received without the recognition of gain or loss, but also of other property or money, then no loss from the exchange shall be recognized.  * * * ↩