Court Opinion

ID: 4619512
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:40:45.478907+00
Date Added: 2024-06-11T07:55:39.306841
License: Public Domain

Geoli Investment Company v. Commissioner. Eccdor Investment Company v. Commissioner.Geoli Inv. Co. v. CommissionerDocket Nos. 6466-66 and 6486-66.United States Tax CourtT.C. Memo 1970-77; 1970 Tax Ct. Memo LEXIS 282; 29 T.C.M. (CCH) 349; T.C.M. (RIA) 70077; March 31, 1970, Filed Stephen H. Anderson and Alonzo W. Watson, Jr., Suite 400 Deperat Bldg., 79 South Main St., Salt Lake City, Utah, for the petitioners. Charles W. Nyquist, for the respondent.  SCOTT Memorandum Findings of Fact and Opinion SCOTT, Judge: Respondent determined deficiencies in petitioners' income taxes for the years and in the amounts as follows: 350 Docket No.PetitionerFiscal yearDeficiencyAddition toTotalendedtax underSec. 531,I.R.C. 19546466-66GeoliApril 30, 1962$20,734.63$13,985.69$34,720.32Investment CoApril 30, 196324,877.3616,744.4841,621.84April 30, 196430,066.2519,923.1149,989.366486-66EccdorSept. 30, 19615,807.795,981.4611,789.25Investment CoSept. 30, 196218,665.6913,276.0331,941.72Sept. 30, 196325,705.6717,397.4343,103.10May 31, 196422,306.9314,449.0836,756.01*283  Some of the issues, including the issue relating to the accumulated earnings tax imposed by section 531, I.R.C. 1954, 1 have been disposed of by agreement of the parties leaving for our decision the following: Whether respondent properly disallowed, under the provisions of section 269, to each petitioner the deduction for dividends received provided for by section 243. Findings of Fact Some of the facts have been stipulated and are found accordingly. Geoli Investment Co. (hereinafter referred to as Geoli), a corporation organized under the laws of Utah on April 28, 1958, had its principal place of business on the date its petition in this case was filed in Salt Lake City, Utah. Eccdor Investment Co. (hereinafter referred to as Eccdor), a corporation organized under the laws of Utah on September 2, 1958, had its principal place of business on the date its petition in this case was filed at Salt Lake City, Utah. Geoli and Eccdor each filed its Federal corporate income tax return for each of the years here in issue with the district director of internal revenue at Salt Lake City, Utah. *284  George S. Eccles (hereinafter referred to as Eccles) was the organizer of each of the corporations and has been the beneficial owner of all of the stock of Eccdor and Geoli since their incorporation. 2 Each of the corporations issued at the date of its incorporation 100 shares of $10 par value stock for total cash of $1,000. During 1957 and 1958 Eccles was a director and shareholder of Utah Construction Company which was engaged in construction of large projects. The Company would build a commercial building, obtain a tenant on a long-term lease for the building and then offer the building for sale. In 1957 and 1958 Utah Construction Company was engaged in developing an industrial park in South San Francisco, California. At one of*285  the meetings of its board of directors held in the latter part of 1957, each of the directors was offered the opportunity to purchase, upon their completion and leasing but prior to their being offered to the public, some of the commercial buildings in the industrial park. The prices at which the buildings were offered to the directors were the same as the prices at which the buildings were to be offered to the public. Eccles committed himself to purchase two of the buildings when they were completed and leased and some of the other directors agreed to purchase some of the properties upon their completion. The properties which Eccles agreed to purchase were the Par-T-Pak Building and the Cleveland Cap-Screw Building. Prior to agreeing to purchase the properties, Eccles considered the estimated return from investment in real properties as compared to other investments as well as the fact that a substantial portion of the cost could be financed by mortgages at comparatively low interest rates. After committing himself to purchase the two properties, Eccles consulted his lawyer with respect to carrying out his agreement to purchase the properties. The lawyer who Eccles consulted had*286  represented Eccles personally and had represented the banks of which 351 Eccles was an officer and director for over 30 years. This attorney advised Eccles not to take title to the properties in his personal capacity but to acquire them through a corporation. He pointed out to Eccles that taking title to the properties in a corporation would relieve him of personal liability with respect to the buildings and any aspect of their operation, would be better from the standpoint of estate planning if the properties were located outside of Utah and would enable Eccles to borrow money to finance the purchase from his own banks. Eccles and his lawyer also discussed the tax aspects of taking title to the buildings in a corporate name. Eccles then requested his attorney to proceed with the organization of Geoli. After Eccles agreed to purchase the two California properties upon their completion he considered other possible real estate acquisitions in Idaho and Utah. In March of 1958 he began to negotiate for the purchase of the El Paso Natural Gas Building in Salt Lake City, (later named the Pacific Northwest Pipeline Co. Building) and the J.C. Penney Building in Twin Falls, Idaho. The*287  offering prices of the El Paso Natural Gas Building and the J.C. Penney Building were $270,000 and $280,000, respectively. In April 1958 Eccles entered into negotiations for the purchase of the Eccles Hotel Bank Building 3 in Logan, Utah for a price of $105,000. Eccles was successful in purchasing the J.C. Penney property and on May 9, 1958, completed the transaction having title to the property taken in the name of Geoli which as heretofore noted had been incorporated on April 28, 1958. Prior to the incorporation of Geoli, Eccles was aware of the fact that by incorporating a business he was relieved of personal liability. Eccles was an officer and director of the First Security Bank of Utah and the First Security Bank of Idaho, both national banks. Eccles knew even before being so advised by his attorney that he was not permitted to borrow money from these banks in his own name, but that a corporation owned by him would be permitted to do so with proper security. Eccles also knew that because he was a director of these banks he*288  would be required to report any personal borrowing from other sources to the board of directors of the banks, thereby disclosing his personal affairs to other businessmen and associates. Eccles was of the opinion that a corporation owned by him would not be required to make such a report. Eccles also was aware that if he contributed stock to his wholly owned corporation to enable it to have security upon which to borrow the money to purchase real estate that the corporation would be entitled to a deduction for dividends received of 85 percent of the dividends received. Eccles was aware that California and Idaho were community property states and was of the opinion that confusing problems might develop in the probation of his estate if he personally owned real property in those states. In January of 1958 Eccles and his wife purchased a long-term lease for $32,000 on a cottage located on the grounds of the El Dorado Country Club. The El Dorado Country Club is a golf club located at Riverside, California of which Eccles was a member. Its membership includes many prominent people. In June of 1958 Eccles and his wife assigned the lease to Geoli. Eccles occupies the cottage from 4 to 12*289  weeks each year and at all other times the cottage is available for renting by other club members in accordance with the club's rules. When the buildings Eccles had agreed to purchase from Utah Construction Company were completed and leased, Eccles decided it would be advisable to form another corporation to hold title to these California properties and therefore had his attorney arrange the organization of Eccdor. On September 4, 1958, 2 days after the organization of Eccdor on September 2, 1958, Eccles had title to the Par-T-Pak Building in South San Francisco taken in its name. Petitioners actually purchased from the sellers with whom Eccles had made arrangements the various properties they owned. Petitioners would give a mortgage on the property and borrow the remaining money needed for the purchase on a demand note secured by stock transferred by Eccles to petitioners. The following chart shows all the real property purchased by each petitioner from its incorporation to the time of trial of this case together with the purchase prices, mortgages given, notes given in connection with the purchase, and terms of the leases on the properties when they were purchased: 352 GeoliEccdorDatepurchasepurchaseOriginalPropertyacquiredpricepricemortgageJ. C. Penney Bldg. TwinMay 9, 1958$280,000.00$165,302.55Falls, IdahoEl Dorado CottageJune 17, 195832,000.00---Riverside, Calif.Par-T-Pak Bldg., South SanSept. 4, 1958$145,901.5595,500.00Fran- cisco, Calif.Cleveland Cap- Screw Bldg.Nov. 11,1958204,982.49135,000.00South San Fran- cisco,Calif.Zeno Hydraulic Corp. Bldg.June 19, 1959185,000.0096,897.59Salt Lake City, UtahB.F. Goodrich Bldg. SaltDec. 19, 1960246,300.00160,000.00Lake City, UtahSkaggs Drug Center Bldg.Sept. 16, 1961350,464.67225,000.00Ogden, Utah*290 OriginalApproximatenoteDate ofTerm ofmonthlyPropertypayableleaseleaserentalJ. C. Penney Bldg. Twin$114,900.00March 24,20 yrs.2.75 % ofFalls, Idaho1954monthlysalesEl Dorado CottageRiverside, Calif.Par-T-Pak Bldg., South San48,000.00Sept. 1,15 yrs.$1,076.00Fran- cisco, Calif.1958Cleveland Cap- Screw Bldg.68,000.00Nov. 1,15 yrs.1 1,625.00South San Fran- cisco,1958Calif.Zeno Hydraulic Corp. Bldg.90,000.00April 15,15 yrs.1 1,260.00Salt Lake City, Utah1958B.F. Goodrich Bldg. Salt90,000.00Dec. 1,15 yrs.1 1,642.00Lake City, Utah1960Skaggs Drug Center Bldg.124,000.00April 1,20 yrs.1 2,333.34Ogden, Utah19611*291  On December 31, 1964, petitioners each purchased for $478,710 a one-fourth ownership in the Shoshone Pipeline Ltd., a partnership. In July 1968, the Shoshone Pipeline interest was sold and petitioners each acquired one-fourth ownership in the Cheyenne Pipeline Co. for $400,000. In order to enable petitioners to finance their real estate purchases, Eccles transferred certain stock which he owned to each petitioner. These stocks were carried on petitioners' books as "paid-in surplus" at their basis to Eccles. The following charts show for each Geoli and Eccdor the dates of transfer of the stocks, the number of shares transferred, and the bases of the stocks in Eccles' hands which is the same bases at which they were carried on the corporate books:  GeoliInvestment CompanyNumber ofsharesName of companyEccles' basesDatetranferredissuing stockin the stocks1958May 166,000First Security$71,721.67CorporationMay 26200Mountain Fuel Supply16,011.00CompanyMay 272,333Farmers Underwriters72,552.70AssociationMay 281,000Utah Construction Company25,023.80June 133,000Amalgamated Sugar Company86,429.77- commonBalance April271,738.9430,19591959Sept. 105,000Amalgamated Sugar Company20,027.99- commonBalance April291,766.9330,19601962March 15,000Eccles Investment Company12,128.15Balance April$303,895.0830,1964Eccdor Investment Company1958Sept. 55,000First Security$42,646.19CorporationNov. 288,000First Security56,005.29CorporationNov. 281,500Amalgamated Sugar Company29,799.87- commonBalance Sept.128,451.3530,19591962March 110,000Eccles Investment Company24,256.30Balance Sept.152,707.6530,19621963Jan. 24.5,000Eccles Investment Company12,128.15Balance Apr.$164,835.8030,1964*292  Eccles is president of the First Security Corpo Eccles is president of the First Security Corporation. He had owned the 19,000 shares of stock in that company which he contributed to Geoli and Eccdor since 1928. The market value of these shares of stock in 1958 was substantially in excess of Eccles' bases in the stock. Eccles Investment Company is a personal holding company, the assets of which are almost entirely stock. Eccles had owned the 20,000 shares of this stock which he contributed to Geoli and Eccdor since 1912. The market value of this 20,000 shares of stock on April 30, 1964, was approximately $700,000. None of the Eccles Investment Company stock was pledged by Geoli or Eccdor as security for bank borrowing. Most of the stocks contributed to Geoli and Eccdor were held and not sold by them. The only stocks contributed by Eccles to petitioners which were sold by them were 150 shares of common stock of Amalgamated Sugar Company, 900 shares of the First Security Corporation, and 380 shares of Mountain Fuel Supply Company. Petitioners did purchase and sell stocks during the years here in issue. The following chart shows such purchases and sales by petitioners: Geoli Investment CompanyDate ofNumber of sharespurchasepurchasedCompanyAmountJuly 7, 19585Permanente Cement$5.10CompanyJan. 22, 195910Amalgamated Sugar400.00Co. - CommonFeb. 10, 195935Amalgamated Sugar1,400.00Co.Sept. 4, 1959400Morrison-Knudsen14,475.00CompanyOct. 8, 19591,411Amalgamated Sugar12,699.00Co. - PreferredOct. 1, 19593,000Lucky Mae Uranium14,981.40Oct. 8, 19593,000Lucky Mae Uranium14,400.00Nov. 5, 1959900Aubrey G. Lanston9,000.00and CompanyApril 22, 1960700Union Pacific19,001.90Railroad CompanyFeb. 23, 1961900Aubrey G. Lanston9,000.00and Co. - Class AJuly 21, 19612,500Hidden Splendor24,884.96Mining Co. - 6%preferredFeb. 16, 1962200Husky Oil Company -20,000.006-1/2% preferredMay 4, 1962205Husky Oil Company -20,500.006-1/2% preferredMay 21, 1962500Union Pacific16,049.40Railroad CompanyMay 23, 1962400Utah Power and Light10,260.00Company - $1.18cumulative preferredBSept. 21, 19621,000Cyprus Mines23,750.00CorporationAug. 23, 1963600Husky Oil Company -60,000.006-1/2% preferredTotal stocks$270,806.76purchasedStocks paid in303,895.08Total$574,701.84Less stockssold:Apr. 20, 1960200Amalgamated Sugar$5,658.00Co. CommonApr. 22, 1960300Morrison Knudsen Co.10,875.00Apr. 22, 1960380Mt. Fuel Supply Co.7,948.50March 16, 1961500First Sec. Invest.376.18Co.Feb. 2, 1962400First Sec. Invest.334.88Co.Aug. 22, 1962400Utah Power and Light10,260.00Co. $1.18 cumulativepfd.Sept. 20, 19622,500Hidden Splendor24,884.96Mining Co. -PreferredJuly 29, 19631,000Cyprus Mines Corp.23,750.00July 29, 1963100Morrison Knudsen Co.3,600.00Total stocks sold87,687.52Balance April$487,014.3230, 1964Eccdor Investment CompanySept. 4, 1959900Morrison-Knudsen$32,606.27CompanyNov. 5, 1959900Aubrey G. Lanston &9,000.00CompanyApr. 20, 1959200Amalgamated Sugar9,800.00Company - CommonJuly 21, 19612,500Hidden Splendor24,884.96Mining CompanyFeb. 16, 1962200Husky Oil Company -20,000.006-1/2% pfd.May 4, 1962200Husky Oil Company -20,000.006-1/2% pfd.May 21, 1962500Union Pacific16,036.83Railroad CompanyMay 23, 1962400Utah Power & Light10,260.00Company - $1.18cumulative preferredSept. 21, 19621,000Cyprus Mines23,750.00CorporationJuly 3, 1963400First Security20,000.00CorporationAug. 23, 1963600Husky Oil Company -60,000.006-1/2% pfd.Total stocks$246,338.06purchasedStocks paid in164,835.80Total$411,173.86Less stockssold:Feb. 27, 1961906Aubrey G. Lanston &$9,000.00CompanyApr. 30, 1962100First Security In-60.44vestment CompanyAug. 28, 1962400Utah Power & Light10,260.00Co. - $1.18cumulative pfd.Sept. 20, 19622,500Hidden Splendor24,884.96Mining Co.July 29, 1963750Cyprus Mines17,812.50CorporationJuly 29, 1963400Morrison-Knudsen Co.14,500.00Total stocks sold76,517.90Balance April$334,655.9630, 1964*293  Under the lease on the J.C. Penney Building the landlord is liable for taxes, insurance, painting, and redecorating every 5 years, and exterior and structural maintenance and heating and air conditioning repairs and replacement. The monthly rent is computed by a formula of 2.75 percent of the gross monthly sales with a provision that if the annual sales exceed $1,400,000, the lessee may require the landlord to build a second floor according to the specifications set out in the lease. By 1964 only $582 had been added to Geoli's basis in the J.C. Penney Building for capital improvements. The following chart shows the expenses in connection with the J.C. Penney lease and the rents received by Geoli: FireLiabilityPropertyYearinsuranceinsurancetaxMiscellaneousRent1958$459.52$227.27$ 831.23$ 169.29Not shown inthe record1959404.3822.475,734.801,519.26Not shown in(Paint-glass)the record1960404.385,848.10Not shown inthe record1961$404.38$205.89$5,681.26$ 106.49$ 29,238.73(Front door)1962404.385,687.9934,541.771963739.855,916.22100.0037,789.97*294  In each of the other leases on petitioners' buildings the lessee paid a stated monthly rental and was liable for property taxes, fire and liability insurance, interior repairs and maintenance, and with the exception of the B.F. Goodrich Building for the exterior maintenance and repairs. The lease on the Skaggs Drug Building limited the responsibility of the lessee to $1,000 annually for each interior and exterior repair. The record does not contain the lease on the Par-T-Pak Building. The following charts show petitioners' expenses in connection with each building and the rents received from each building for the years indicated: YearProperty taxInsuranceMiscellaneousRentZeno HydraulicBuilding195911111960$1,693.32119611,758.20$ 49.69$16,878.2019621,908.0673.2517,028.0619631,970.58$25.071B.F. GoodrichBuilding19612,615.7180.5522,319.7119622,858.9922,562.9919632,952.6823.9222,636.68El DoradoCottage1958$1,000.00 per1contract19592,341.50 per1contract19602,994.93 per1contract19613,261.65 per4,930.00contract19623,173.92 per4,069.00contract19633,885.97 per2,121.50contract19593,525.682 80.201Par-T-PakBuilding19582 80.21$119.79119592,188.022 80.21119602,155.282 80.21119612,421.762 80.21119622,431.142 73.2415,931.2619632,656.882 163.2310,412.24Cleveland CapScrew Building1958185.642 80.20186.00119603,418.802 80.20119613,146.502 73.20n2/ 116.06119623,146.662  73.2019,993.1319633,439.522 150.2313,000.00(short)Skaggs DrugCenter Building1960119613,794.082 116.06119624,999.6237,656.9319635,773.722 190.1031,260.91(short year)*295 During the years ending April 30, 1959, through 1964, Geoli's total rental income was as follows: Year ended April 30Rents1959$26,778.02196045,369.96196160,029.56196273,366.64196378,201.82196479,658.73During the years ending September 30, 1959 through 1963 and the short year October 1, 1963 through May 31, 1964, Eccdor's rental income was as follows: Year ended September 30Rents1959$31,325.00196035,255.54196149,959.40196267,710.97196373,581.32October 1, 1963 throughMay54,673.1531, 1964Neither Eccdor nor Geoli acquired any real estate subsequent to September 1961. Subsequent to the year 1964 Geoli sold the property which was under lease to J.C. Penney Company, and Eccdor sold the properties which were under lease to Cleveland Cap Screw Company and Par-T-Pak. Eccles' personal office is located in the Deseret Building in Salt Lake City. Geoli and Eccdor used this address as their business address. They had no office space separate from Eccles' personal office space and their names are not listed on*296  the building directory.  There were no telephone listings for either of petitioners. Neither Geoli nor Eccdor had printed or engraved business stationery. Correspondence carried on in the name of Geoli and Eccdor was on Eccles' letterhead with the name of Geoli or Eccdor always typed below the closing of the letter and often typed at the top. Neither petitioner paid any amounts designated as wages or salaries from the time of its incorporation through the years here in issue. At all times since their formation each petitioner has maintained separate and complete books of account and an active bank account. Regular shareholders and directors meetings have been held by the directors and shareholders of each petitioner and corporate minutes of these meetings have been kept. Each petitioner has entered into various contracts in its own name. From the time of its incorporation to the close of the years here in issue neither petitioner has paid any dividend. During 1958, 1959, and early 1960 Eccles entered into negotiations for the purchase of the Pacific Northwest Pipeline Company Building in Salt Lake City for $270,000. Eccles contemplated purchasing this building for either Geoli*297  or Eccdor. There was a merger between Pacific Northwest Pipeline Company and El Paso Gas and the building was withdrawn from the market. In 1961 Eccles made an offer of $800,000 for the purchase of the W.T. Grant Building and an offer of $800,000 for the Eccles 358 Building in Ogden, Utah. Both of these properties were sold to higher bidders for $850,000 and $1,000,000, respectively. Between 1960 and 1965 Eccles investigated the possibility of purchasing the Strevell Paterson Building, Addressograph Building, Merrill Lynch, Pierce, Fenner & Smith Building and the Blair Motor Company Building, all of Salt Lake City, and the Seattle Garage, Seattle, Washington. For various reasons all five of these buildings were withdrawn from the market. In 1964 Geoli negotiated for the acquisition of a water system in Mexico, but the system was not sold because of its being financed by a local bond issue. The dividend income reported in each of the joint Federal income tax returns filed by Eccles and his wife for the years 1957 through 1964 and the highest income bracket applicable to the income reported on each of these returns are as follows: DividendsHighest taxYearreportedbracket applicable1957$139,409.0675 percent1958140,764.8284 percent1959124,386.0175 percent1960156,451.9378 percent1961207,342.6384 percent1962197,411.9685 percent1963197,112.501964225,872.68*298  Petitioners on their Federal corporate income tax returns for the years in issue reported dividends received and claimed deductions for dividends received in the following amounts:DividendsDividends receivedPetitionerFiscal year endedreported-deductions claimedGeoliApril 30, 1962$58,624.81$49,831.09GeoliApril 30, 196363,464.6253,944.93GeoliApril 30, 196472,010.5661,208.96EccdorSept. 30, 196132,106.4019,359.32EccdorSept. 30, 196254,431.0043,716.35EccdorSept. 30, 196364,765.1055,041.84EccdorSept. 30, 196452,712.1044,805.29The highest tax bracket applicable to the income reported on the corporation returns filed by each petitioner for its taxable years 1959 through 1963 was 30 percent. The 52 percent bracket was applicable to some of the income reported by each petitioner for the taxable year ended in 1964. Changes in the personal holding company law caused Eccles to have Geoli and Eccdor each purchase an interest in the Shoshone Pipelines, Ltd. After this purchase by petitioners, Shoshone purchased another pipeline, a gasoline plant, producing wells and a small pipeline in New Mexico and*299 Texas. Each of petitioners also acquired an interest in the Cheyenne Pipeline Co., a general partnership operating a gathering and transmission system covering many states. Eccles was active on behalf of both petitioners in negotiating the acquisition of these interests and in the management of both Shoshone and Cheyenne. Eccles was so active in the management of Shoshone on behalf of petitioners that the general partner, Nielsen Enterprises, considered petitioners also to be general partners and inquired of Eccles' attorney whether a change in documentation was necessary. The following show the balance sheets and income statements for Geoli for the years 1959 through 1964: 359 Geoli Investment CompanyComparative Balance Sheet -- April30, 1959 through April 30, 1964195919601961ASSETSCash$ 3,037.88$ 8,884.58$ 17,928.25Stocks at cost273,544.04353,647.83362,271.65Stocks-apprec. to market value388,000.21667,140.30993,975.10Automobile4,452.804,452.80Less: Accum. depreciation(311.68)(2,092.84)Furniture & fixtures236.821,567.26Less: Accum. depreciation(78.91)Real estate312,000.00497,000.00743,882.00Less: Accum. depreciation(9,901.34)(24,785.50)(45,172.61)Total Assets$966,680.79$1,506,265.15$2,076,732.70LIABILITIESMortgage notes payable$158,945.19$ 241,365.60$ 383,737.53Com. notes payable122,700.00243,500.00297,800.00Total liabilities$281,645.19$ 484,865.60$ 681,537.53CAPITAL & RETAINED EARNINGS:Cap. stock; auth. 1,000 shares of1,000.001,000.001,000.00$10 par val. each issued &outstand. 100 sharesPaid-in surplus271,738.94291,766.93291,766.93Surp. aris. from apprec. of stocks388,000.21667,140.30993,975.10to market val.Retained earnings24,296.4561,492.32108,453.14Total capital and retained685,035.601,021,399.551,395,195.17earningsTOTAL$966,680.79$1,506,265.15$2,076,732.70Geoli Investment CompanyComparative Statement of Incomeand Retained EarningsFor the Fiscal Years Ended April30, 1959, through April 30, 1964Dividends$22,664.24$38,393.11$ 44,945.45Rents26,778.0245,369.9660,029.56InterestGain on sale of securities3,861.109,088.77Gain on sale of automobileTotal income$49,442.26$87,624.17$114,063.78ExpensesInterest12,377.0622,430.0329,163.57Insurance686.79500.10568.32Property taxes831.235,859.917,618.97Other taxes20.00912.282,022.37Depreciation9,901.3415,195.8422,247.18Automobile49.05180.28Business expense115.001,622.03650.00Repairs and maintenance1,169.292,349.503,023.93Miscellaneous45.10Total expenses25,145.8148,918.7465,474.62Income before Federal income taxes24,296.4538,705.4348,589.16Provision for Federal income tax1,509.561,628.34(of prior yr.)Net income$24,296.45$37,195.87$ 46,960.82Retained earningsBeginning$24,296.45$ 61,492.32Ending$24,296.45$61,492.32$108,453.14*300 Geoli Investment CompanyComparative Balance Sheet -- April30, 1959 through April 30, 1964196219631964ASSETSCash$ 12,339.59$ 3,324.92$ 31,320.03Stocks at cost418,949.88454,364.32487,014.32Stocks-apprec. to market value1,078,648.891,398,449.081,280,752.43Automobile4,611.704,611.704,611.70Less: Accum. depreciation(768.64)(2,301.69)(3,164.04)Furniture & fixtures1,567.262,301.984,613.87Less: Accum. depreciation(235.63)(409.67)(725.81)Real estate743,882.00743,882.00748,467.96Less: Accum. depreciation(71,884.32)(97,067.41)(120,937.63)Total Assets$2,187,110.73$2,507,155.23$2,431,952.83LIABILITIESMortgage notes payable$ 361,732.32$ 331,966.01$ 296,488.15Com. notes payable277,100.00241,400.00245,700.00Total liabilities$ 638,832.32$ 573,366.01$ 542,188.15CAPITAL & RETAINED EARNINGS:Cap. stock; auth. 1,000 shares of1,000.001,000.001,000.00$10 par val. each issued &outstand. 100 sharesPaid-in surplus303,895.08303,895,08303,895.08Surp. aris. from apprec. of stocks1,078,648.891,398,449.081,280,752.43to market val.Retained earnings164,734.44230,445.06304,117.17Total capital and retained1,548,278.411,933,789.221,889,764.68earningsTOTAL$2,187,110.73$2,507,155.23$2,431,952.83Geoli Investment CompanyComparative Statement of Incomeand Retained EarningsFor the Fiscal Years Ended April30, 1959, through April 30, 1964Dividends$ 58,624.811 $ 64,302.12$ 72,010.56Rents73,366.6478,201.8279,658.73Interest200.00Gain on sale of securities6,062.563,676.08245.03Gain on sale of automobile1,654.16Total income$139,708.17$146,180.02$152,114.32ExpensesInterest34,952.0932,805.9429,247.10Insurance543.22404.38788.84Property taxes10,155.5710,539.7910,906.05Other taxes2,197.092,697.143,243.79Depreciation28,191.1926,890.1825,048.71Automobile436.47267.00522.17Business expense644.991,248.91894.26Repairs and maintenance3,574.033,247.173,985.97MiscellaneousTotal expenses80,694.6578,100.5174,636.89Income before Federal income taxes59,013.5268,079.5177,477.43Provision for Federal income tax2,732.222,368.893,805.32(of prior yr.)Net income$ 56,281.30$ 65,710.62$ 73,672.11Retained earningsBeginning$108,453.14$164,734.44$230,445.06Ending$164,734.44$230,445.06$304,117.17*301 The following show the balance sheet and income statement for Eccdor for the years 1959 through April 30, 1964:  Eccdor Investment CompanyComparative Balance Sheet -- Fiscalyears ended September 30, 1959through September 30, 1963 andApril 30, 1964195919601961ASSETSCash in bank$ 6,065.54$ 4,573.24$ 6,513.55Stocks at cost161,057.62179,857.62195,742.58Stocks-apprec. to market value730,817.38852,529.881,549,982.42Automobile1,703.351,703.35Less: Accum. depreciation(551.54)(1,153.22)Real estate347,734.50348,109.21698,948.59Less: Accum. depreciation(12,795.84)(25,630.95)(51,618.23)Other assets Accrued interestTotal assets$1,232,879.20$1,360,590.81$2,400,119.04LIABILITIESMortgage notes payable224,283.14216,989.90432,809.31Commercial notes payable118,000.00105,000.00209,000.00Lease deposits2,466.002,466.002,466.00Total liabilities$ 344,749.14324,455.90644,275.31CAPITAL & RETAINED EARNINGS:Cap. stock: auth. 1,000 shares of$10 par va. each issued & outstand.100 shares1,000.001,000.001,000.00Paid-in surplus128,451.35128,451.35128,451.35Surp. aris. from apprec. of stocks730,817.38852,529.881,549,982.42to market valueRetained earnings27,861.3354,153.6876,409.96Total capital and retained earnings888,130.061,036,134.911,755,843.73TOTAL$1,232,879.20$1,360,590.81$2,400,119.04Eccdor Investment CompanyComparative Statement of Income andRetained EarningsFor the Fiscal Years EndedSeptember 30, 1959 throughSeptember 30, 1963, andFor the 7 Months Ended April 30,1964195919601961IncomeDividends$24,725.00$31,311.25$32,108.40Rents31,325.0035,255.5449,959.40Gain (loss) on sale of securitiesInterestTotal income56,050.0066,566.7982,067.80ExpensesInterest14,691.5017,804.0324,587.06Insurance160.235,713.70160.23Property taxes185.64160.235,597.94Other taxes20.001,033.111,293.02Depreciation12,795.8413.386.6526,588.96Automobile464.92Business expense600.00Miscellaneous335.46123.20Total expenses28,188.6738,220.9259,292.13Income before Federal income taxes27,861.3328,345.8722,775.67Provision for Federal income tax2,053.52519.39(of prior year)Net income$27,861.33$26,292.35$22,256.28Retained earningsBeginning27,861.3354,153.68Ending$27,861.33$54,153.68$76,409.96*302  Eccdor Investment CompanyComparative Balance Sheet -- Fiscalyears ended September 30, 1959through September 30, 1963 andApril 30, 1964196219631964ASSETSCash in bank$ 21,908.20$ 9,871.71$ 71,655.74Stocks at cost274,840.31334,655.96334,655.96Stocks-apprec. to market value1,445,362.191,925,622.791,779,631.04Automobile1,703.351,703.351,703.35Less: Accum. depreciation(1,203.35)(1,203.35)(1,203.35)Real estate699,748.63700,548.67701,348.71Less: Accum. depreciation(73,217.09)(98,450.46)(112.392.61)Other assets Accrued interest487.50Total assets$2,369,142.24$2,873,236.17$2,775,398.84LIABILITIESMortgage notes payable417,775.53402,615.79394,727.35Commercial notes payable219,000.00184,000.00184,000.00Lease deposits2,466.002,466.002,466.00Total liabilities639,241.53589,081.79581,193.35CAPITAL & RETAINED EARNINGS:Cap. stock: auth. 1,000 shares of$10 par va. each issued & outstand.100 shares1,000.001,000.001,000.00Paid-in surplus152,707.65164,835.80164,835.80Surp. aris. from apprec. of stocks1,445,362.191,925,622.791,779.631.04to market valueRetained earnings130,830.87192,695.79248,738.65Total capital and retained earnings1,729,900.712,284,154.382,194,205.49TOTAL$2,369,142.24$2,873,236.17$2,775,398.84Eccdor Investment CompanyComparative Statement of Income andRetained EarningsFor the Fiscal Years EndedSeptember 30, 1959 throughSeptember 30, 1963, andFor the 7 Months Ended April 30,196419621963April 30,1964IncomeDividends$51,431.00$64,755.10$52,712.10Rents67,710.9773,581.3251,972.15Gain (loss) on sale of securities5,215.00(1,663.89)Interest400.00Total income124,356.97136,672.53105,084.25ExpensesInterest35,690.9932,347.9215,986.72Insurance378.59146.47146.47Property taxes9,382.4210,593.0511,880.64Other taxes973.992,252.112,636.63Depreciation21,648.9925,233.3713,942.15Automobile176.17126.6075.26Business expense660.00850.00850.00MiscellaneousTotal expenses68,911.1571,549.5245,517.87Income before Federal income taxes55,445.8265,123.0159,566.38Provision for Federal income tax1,024.913,258.093,523.52(of prior year)Net income$54,420.91$61,864.92$ 56,042.86Retained earningsBeginning76,409.96130,830.87192,695.79Ending$130,830.87$192,695.79$248,738.65*303  361  Each petitioner claimed on its Federal income tax return for each of the years here in issue the deduction provided under section 243 for 85 percent of the dividends received by it from other corporations. Respondent in his notice of deficiency disallowed to each petitioner this claimed deduction for each year here in issue. The explanation given in the notice of deficiency to Geoli was that it had been determined that a principal purpose for your formation was to obtain the benefit of the dividend received deduction on dividends paid on stock contributed to the corporation. Accordingly, the dividend received deductions claimed on your return * * * have been disallowed under the authority of Section 269 of the 1954 Internal Revenue Code. The same explanation was given in the notice of deficiency to Eccdor except that the words "under the authority of Section 269 of the 1954 Internal Revenue Code" were not contained in the statement of explanation of adjustments. Opinion Petitioners take the position that section 2694 does not authorize respondent to disallow to a corporation the deduction for dividends received*304  provided for under section 243. Petitioners further contend that if respondent is authorized to disallow such a deduction under the provisions of section 269, his disallowance of the claimed deduction to each of petitioners in this case was erroneous since the principal purpose of Eccles in the formation and the acquisition of the stock of each petitioner was not evasion or avoidance of Federal income tax by securing the benefits of the dividends received deductions for each of the corporations. *305  Respondent contends that he is authorized under section 269 to disallow to a corporation a deduction for dividends received and that his disallowance in the instant case was proper since the evidence fails to show that the principal purpose for which Eccles formed each petitioner and acquired its stock was not the evasion or avoidance of Federal income tax by securing the benefit of the deduction for dividends received allowed by section 243. At the outset it might be noted that respondent in his notice of disallowance stated that "a principal purpose" of the formation of each petitioner was to obtain the benefit of a deduction for dividends received. No point is made by petitioners of the use by respondent in his notice of deficiency of the word "a" and not the word "the" which is the word used in section 269. However, petitioners call attention to the fact, and respondent does not contend to the contrary, that in order for respondent's disallowance to each petitioner of the deductions for dividends received to be sustained "the" principal purpose for the acquisition by Eccles of the stock of each petitioner must be tax avoidance. As we stated in Bush Hog Manufacturing Co., 42 T.C. 713">42 T.C. 713, 729 (1964),*306 "under section 269 petitioner need prove only that the evasion or avoidance of tax was not the 'principal purpose' in forming" the corporation.  362 The requirement of section 269 of acquisition of control by a person or a corporation after October 8, 1940, is, of course, met in this case since Eccles became the beneficial owner of all the stock of each petitioner at its formation in 1958. It is now settled that section 269 is applicable whether the contested tax benefit is claimed by the corporation control of which is acquired or by the person who acquired that control.  Bush Hog Manufacturing Co., supra. Therefore, if the deduction for dividends received provided for under section 243 is a type of deduction encompassed within the provisions of section 269, the factual determination which must be made in this case is whether the principal purpose of Eccles in forming the two corporate petitioners was to secure the benefit of the deduction for dividends received. From the facts*307  in this case we do not doubt that at the time Eccles was planning the formation of each of petitioners, he considered the advantages which would result from transferring stocks greatly appreciated in value to these corporations as a contribution to capital so that the corporations would be able to borrow funds to finance real estate dealings on the basis of the appreciated values of the stock contributed to them even though Eccles would not have made a disposition of the stock in such a manner as to result in capital gains taxable to him. We do not doubt that in considering the formation of the corporations Eccles also considered the fact that the corporations would be entitled to deductions for 85 percent of the dividends received on the stocks which he contributed to them. In our view the fact that the corporations would be able to use the appreciated value of the stocks as security for amounts borrowed to finance the purchase of real properties under long-term leases was at least as important to Eccles in considering the formation of petitioners as was the fact that the corporations would have available to them the deduction for dividends received. However, in our view of the*308  facts the reason for the formation of Geoli was that Eccles had committed himself to acquire from Utah Construction Company two buildings which were then under construction by that company at such time as the building had been completed and leased for a long term. Eccles testified specifically that he committed himself to acquire the buildings prior to considering how title to the buildings would be taken and that after making the commitment to acquire the buildings he discussed that problem with his attorney. The attorney's testimony substantiated the testimony of Eccles. While the other benefits which might be derived by taking title to the properties in a corporation owned by Eccles were discussed by Eccles and the attorney prior to the actual incorporation of Geoli, our conclusion from the facts is that the advantages of holding income properties which were under long-term leases in a wholly owned corporation as distinguished from holding such property as an individual was a factor in Eccles' decision to form Geoli which was of at least equal weight to any other factor. The fact that the corporate acquisitions could be financed by borrowing on stocks which had appreciated in value, *309  thereby having Eccles personally in no way required to personally guarantee loans so as to be required to disclose his financial affairs to other directors of the banks of which he was an officer and director, was in our view likewise a factor of equal weight to any other factor influencing Eccles' formation of Geoli. The deduction for dividends received which the corporations would obtain with respect to the dividends paid on the stock transferred to them by Eccles was only one factor considered and it was only one of several of Eccles' purposes in forming Geoli. We therefore conclude that the evidence in this case does not support a finding that a tax avoidance purpose exceeded in importance any other purpose in the formation of Geoli and Eccdor. For this reason we hold that a tax avoidance purpose did not constitute the "principal purpose" of the acquisition by Eccles of control of Geoli and Eccdor. Commodores Point Terminal Corporation, 11 T.C. 411">11 T.C. 411, 418 (1948). We have considered the fact that prior to the completion of buildings which Eccles had originally committed himself to purchase, Eccles had agreed to purchase other property and the J.C. Penney Company Building*310  had been purchased by Geoli. However, this does not cause us to change our conclusion that a primary purpose in Eccles' formation of Geoli was to have that corporation take title to the properties he had agreed to purchase from Utah Construction Company. This fact merely shows that prior to the time that the purchase from Utah Construction Company 363 had been consummated, Eccles had arranged to have Geoli purchase other real property which was under long-term lease. It is not completely clear in the record why Eccles formed a second corporation to purchase the two California properties which he had agreed to purchase from Utah Construction Company. Eccles' testimony was to the effect that since these two properties were in California, he considered there to be some advantage in forming Eccdor and having these properties held by a separate corporation from Geoli which had by that time acquired properties in other States. He further testified that he later decided that there was no advantage in having Eccdor hold only California properties. Whatever the motivating factor in the formation of Eccdor about 5 months after Geoli was formed, there was no purpose of tax avoidance by obtaining*311  a deduction for dividends received since such a deduction could have been obtained as well by placing all the rental properties and all the contributed stocks in one as distinguished from two corporations. We therefore conclude that the principal purpose in the formation of Eccdor was not the avoidance of tax by receipt of a deduction for dividends received. Having concluded on the basis of the evidence in this case that the principal purpose of the formation of Geoli and Eccdor was not the avoidance or evasion of Federal income tax by securing the benefit of deductions for dividends received which would not have been available had those corporations not been formed, it is unnecessary for us to discuss whether a deduction for dividends received is within the purview of section 269. It might be noted that this issue has been inherent in two prior cases decided by this Court. 5 In both of these cases we concluded that the principal purpose of the acquisition was not tax avoidance and did not reach the question of the applicability of section 269 to disallow a deduction for dividends received, if any such issue was raised by the parties in either case. *312  Decision will be entered under Rule 50.  Footnotes1. All references are to the Internal Revenue Code of 1954.↩2. While both respondent and petitioner requested the finding that George S. Eccles owned or was the sole beneficial owner of all of petitioners' stock, the chart of outstanding stocks found in the stipulation showed the 100 shares owned as follows: ↩NameNumber of sharesAmountGeorge S. Eccles96$ 960Delores Dore Eccles110S. J. Quinney110C. U. Benzley110Grace F. Madison110Total100$1,0003. The Eccles Hotel Bank Building is not a hotel but derives its name because it had been a hotel owned at an earlier date by the Eccles' family.↩1. The monthly rental rates are subject to adjustments based on increases in taxes or insurance when paid by petitioners. In all leases, except J.C. Penney, the lessee is liable for all property taxes, assessments, insurance, interior repairs and maintenances and exterior repairs and maintenances. [Petitioners are liable for exterior repairs and maintenance in the B.F. Goodrich lease and for the excess of $1,000 annually for interior and exterior repairs in the Skagg Drug Center Bldg. lease.] The terms of the lease for the Par-T-Pak Bldg. are not shown by the evidence.↩1. Individual figure not shown in the record. ↩2.  Estimate from Eccdor's tax returns.↩1. The income tax return for 1963 shows dividends income in the amount of $63,464.62. The statutory notice of deficiency required that $837.50 be included in the dividend income. This adjustment was conceded by petitioner.↩4. SEC. 269. ACQUISITIONS MADE TO EVADE OR AVOID INCOME TAX. (a) In General. - If - (1) any person or persons acquire, or acquired on or after October 8, 1940, directly or indirectly, control of a corporation, or (2) any corporation acquires, or acquired on or after October 8, 1940, directly or indirectly, property of another corporation, not controlled, directly or indirectly, immediately before such acquisition, by such acquiring corporation or its stockholders, the basis of which property, in the hands of the acquiring corporation, is determined by reference to the basis in the hands of the transferor corporation, and the principal purpose for which such acquisition was made is evasion or avoidance of Federal income tax by securing the benefit of a deduction, credit, or other allowance which such person or corporation would not otherwise enjoy, then the Secretary or his delegate may disallow such deduction, credit, or other allowance. For purposes of paragraphs (1) and (2), control means the ownership of stock possessing at least 50 percent of the total combined voting power of all classes of stock entitled to vote or at least 50 percent of the total value of shares of all classes of stock of the corporation.↩5. Commodores Point Terminal Corporation 11 T.C. 411">11 T.C. 411↩ (1948) and Armais Arutunoff, T.c. Memo. 1963-192.