Harbour Properties, Inc. v. Commissioner

HARBOUR PROPERTIES, INC., ET AL., 1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Harbour Properties, Inc. v. Commissioner

Docket Nos. 4437-68 thru 4455-68

United States Tax Court

T.C. Memo 1973-134 ; 1973 Tax Ct. Memo LEXIS 149 ; 32 T.C.M. (CCH) 580 ; T.C.M. (RIA) 73134 ;

June 25, 1973 , Filed

*149 Held: The transfers of real estate by Gould and by Hunter, Louis and Rosen to various corporations receiving notes in return, and the conveyances by several of these corporations to other corporations were not sales evidenced by debt obligations but rather were equity contributions controlled by the nonrecognition provisions of sec. 351 . Therefore, distributions received by the transferors are taxable as dividends to the extent of the corporate distributors' earnings and profits.

Held further: The gain recognized by Gould on the sale of the Clin Clara property to Shore is taxable at capital gain rates. The property was held for investment.

Held further: Taladen Co. was formed for no reason other than to obtain tax benefits, and its income must be reported by Gould. Alternatively, even if such were not the case, the income reported by Talden was earned by Gould and therefore under the "assignment of income" doctrine must be reported by him. Held further: While we determined the income to be additional compensation from Coral Glade Co., Coral Way Co. and Darlington Manor, Inc. to Gould, sec. 267(a) (2) denies the corporations a deduction to the extent payments were not made within *150 2-1/2 months after the close of the year in which earned. Held further: Since the debt instruments were determined to be stock the over 50 percent requirements of sec. 267(b) (2) are satisfied.

Held further: The advances by Gould to Peat Corp. are determined to be bona fide debts. Held further: Gould need not first allocate repayments to interest, as the parties have stipulated that the debtor characterized such payments differently.

Held further: The surtax exemptions claimed by Coral Way Co. and Sans Souci Co. are disallowed under the provisions of sec. 1551 . Held further: One of the surtax exemptions claimed by either Southern Rock and Fill Co. or Housing Engineers of Florida, Inc. is disallowed under the provisions of sec. 269 . Held further: The petitioner corporations are determined not to be a controlled group as defined in sec. 1563 , and therefore are not limited to one surtax exemption as required in sec. 1561 . This decision is based on the conclusion that while the debt instruments were held to be stock such stock must be characterized as non-voting and limited and preferred as to dividends and therefore excluded under sec. 1563(c) (1) (A) when determining stock ownership. *151

Held further: Peat Corp. is determined to be a personal holding company since the repayment of the supposed debts were held to be dividend distributions to the extent of the distributors' earnings and profits. 3

Held further: The debt instruments issued by Darlington Manor, Inc., though determined to be stock for other provisions of the Code, do not, under decisions of this Court, represent a second class of stock for purposes of the subchapter S provisions. Therefore the corporation was, during 1960, a valid small business corporation as defined in sec. 1371 .

Held further: Coral Glade Co. and the Goulds are not liable as transferees for the deficiency of Coral Way Co. and Peat Corp. is not liable as the transferee of Camden Corp. The notes issued by the transferee corporations to the transferors, though determined to be equity for tax purposes, would under Florida law be held a valid debt. Thus, the conveyances in return would be held a repayment of pre-existing obligations. Held further: The parties are not liable for an additional tax under sec. 6651(a).

Leonard L. Silverstein and Robert E. Falb , for the petitioners.

Andrew H. Weinstein, for the respondent.

STERRETT

MEMORANDUM *152 FINDINGS OF FACT AND OPINION

STERRETT , Judge: These consolidated cases involve deficiencies in the Federal income tax of Emil and Estelle Gould and a series of corporations in which the Goulds, one or both, have varying degrees of stock interest. Respondent determined the following deficiencies: 2

Petitioner and Docket Taxable Deficiency Additions to Tax under

Number Year Sec. 6651(a) 3 *153

Harbour Properties, Inc. 8/31/60 $6,399.78

Docket No. 4437-68 8/31/61 6,081.90

8/31/64 2,595.96

8/31/66 1,223.58

Coral Glade Company 8/31/60 1,222.57 1,049.67

Transferee of the assets

of Coral Way Land Co. 8/31/62 133,772.35

Docket No. 4438-68 8/31/63 74,225.37

Sunrise Harbour, Inc. 2/29/60 1,255.07

Docket No. 4439-68 2/28/61 6,254.46

2/28/62 184.15

2/28/63 313.10

Peat Corporation 12/31/60 12,467.48

Docket No. 4440-68 12/31/61 9,392.63

12/31/62 309.26

12/31/63 19.285.29

12/31/64 6,828.14

12/31/65 708.12

Estelle Gould, Transferee

of the assets of Coral

Way Land Co. 8/31/60 1,222.57 1,049/67

8/31/62 133,772.35

Docket No. 4441-68 4 8/31/63 74,225.37

Harbour Development Co. 3/31/60 3,821.22

Docket No. 4442-68 3/31/61 3,665.23

3/31/62 2,630.19

Trenton Corporation 9/30/59 12,518.69

Docket No. 4443-68 9/30/60 926.55

9/30/61 4,765.93

9/30/62 7,257.06

9/30/63 1,772.28

Housing Engineers of Florida,

Inc. 4/30/60 $ 5,562.21

Docket No. 4444-68 4/30/61 1,418.87

4/30/62 4,520.41

4/30/63 413.15

Dalton Corporation 8/31/60 8,811.34

Docket No. 4445-68 8/31/61 9.979.71

8/31/62 315.83

8/31/63 575.05

8/3164 2,108.17

8/31/65 884.11

8/31/66 5,257.06

Sans Souci Company 2/29/60 47,601.96

Docket No. 4446-68 2/28/61 25,696.68

2/28/62 3,182.89

2/28/65 1,210.02

Emil J. Gould and Estelle

Gould 12/31/59 87,287.11

12/31/60 78,734.39

Docket No. 4447-68 12/31/61 234,631.80

12/31/62 154,184.38

12/31/63 77,870.57

12/31/64 117,326.27

12/31/65 25,335.62

Southern Rock and Fill

Company 3/31/60 5,419.72

3/31/61 2,632.83

Docket No. 4448-68 3/31/63 571.04

Coral Glade Company 3/31/60 159,727.43

Docket No. 4449-68 3/31/61 20,251.79

3/31/62 24,801.55

3/31/63 81,944.28

3/31/64 1,982.21

3/31/65 18,299.17

3/31/66 29,200.47

Sunrise Properties, Inc. 2/29/60 41,500.66

Docket No. 4450-68 2/28/61 16,849.18

2/28/62 164.91

2/28/63 1,739.08

Luxor Corporation 7/31/60 $916.80

Docket No. 4451-68 7/31/61 9,197.83

7/31/62 811.59

7/31/63 1,905.55

7/31/64 871.76

7/31/65 1,465.11

7/31/66 1,886.48

Peat Corporation, 9/30/59 7,614.41

Transferee of the assets of

Camden Corporation 9/30/60 4,050.76

9/30/63 4,481.99

Docket No. 4452-68 9/30/64 1,953.65

Darlington Manor, Inc. 12/31/60 371,469.94

Docket No. 4453-68 12/31/61 5 (718.30)

12/31/62 (969.64)

12/31/65 956.52

Bay Homesites, Inc. 5/31/61 4,149.92

Docket No. 4454-68 5/31/63 12.85

5/31/64 5,237.09

5/31/66 2,817.84

Emil J. Gould, Transferee of

the assets of Coral Way

Land Co. 8/31/60 6 1,222.57 1,049.67

8/31/62 133,722.35

8/31/63 74,225.37

Docket No. 4455-68

7

Several issues raised in the pleadings have been settled by the parties and can be given effect in the Rule 50 computations. There are however numerous issues remaining to be decided.

(1) Whether the transfers of property, including both land and stock, by Gould to various petitioner corporations and the subsequent transfer of such property by those corporations to other petitioner corporations are valid sales or nontaxable exchanges within the purview of section 351(a), I.R.C. 1954 . 7 *154

Relevant to this issue we must also determine the fair market value at the time of transfer of a substantial portion of the conveyed property.

Alternatively, if such transfers are determined to be valid sales then we must decide whether the gain realized on the sales by Gould to the corporations is taxable as ordinary income or capital gain. 8 Such a determination necessitates a decision relevant to whether Gould held such property for sale to customers in the ordinary course or a trade or business as noted in section 1221(1).

(2) Whether the Clin Clara property sold by Gould to Philip Shore, an unrelated party, on July 1, 1959, was property held for sale to customers in the ordinary course of Gould's *155 trade or business. Such a determination will lead us to a conclusion relevant to the character of the gain recognized as a result of the transaction. 9

(3) Whether the Taladen Co. should be recognized as a separate corporation for Federal income tax purposes, or whether the income reported by such corporation should be included in the gross income of petitioners Emil and Estelle Gould. This decision will guide us in our determination regarding Darlington Manor, Inc.'s, Coral Glade Co.'s, and Coral Way Land Co.'s ability to deduct accrued commissions payable to Taladen in 1960, 1962, 1963, 1965 and 1966.

If we determine that Taladen is a viable corporate entity, we must then decide whether a portion of the deducted commissions is subject to disallowance under the provisions of section 267(a) (2). Alternatively, if we ignore Taladen's existence but find the commissions to be additional earned income (as opposed to dividend income) of Gould we must also determine the applicability of section 267. 9 *156

(4) Whether advances by the Goulds to Peat Corp. are bona fide debts or contributions to capital.

If we determine the existence of a valid indebtedness, we must then decide whether the payments by Peat Corp. 10 to the Goulds from 1963 through 1965 were payments of interest or principal.

(5) Whether each corporate petitioner is entitled to a separate surtax exemption as provided in section 11 or, on the other hand, whether such exemptions must be disallowed due to the language provided in sections 269, 1551 or 1561.

(6) Whether Peat Corp. was a personal holding company as defined in section 542 during taxable years ended December 31, 1961 or 1962. 10

(7) Whether Darlington Manor, Inc. qualified as a subchapter S corporation for the taxable year ended December 31, 1960. Such a decision rests upon our initially determining whether two classes of stock were in fact created. This conclusion is in turn contingent upon our earlier decision regarding the supposed sale *157 versus a section 351 transfer.

(8) Whether Emil and Estelle Gould and Coral Glade Co. are liable as transferees for the deficiency, if any, of Coral Way Land Co. 11

(9) Whether Peat Corp. is liable as transferee for the deficiency, if any, of Camden Corp.

(10) Whether petitioners are entitled to net operating losses for certain of the years here involved.

(11) Whether any of the transferor corporations is liable for the addition to tax provided in section 6651(a). 11

FINDINGS OF FACT

Some of the facts have been stipulated. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference.

General

Petitioners Emil J. Gould (sometimes hereinafter referred to as Gould) and Estelle Gould (sometimes hereinafter referred to as Estelle), husband and wife, resided in Miami, Florida as of the date their petition was filed with the Tax Court. They filed joint Federal income tax returns for the taxable years ended December 31, 1959, 1960, 1961, 1962, 1963, 1964 and 1965, with the district director of internal revenue at Jacksonville, *158 Florida. 12

Housing Co. of Florida (not docketed) was incorporated on May 17, 1954 as a land development and construction company. The Goulds were the stockholders having paid in $2,500 each for 10 shares of stock. Emil Gould was president.

Sunrise Properties, Inc. was incorporated on August 11, 1955 as a land development company. Its stockholders were as follows:

Name Title Number of Shares Amount Paid in

Emil Gould President 75 $6,000

Estelle Gould - n12 75 6,000

Burt Hunter Vice President & Secy. 70 5,600

Daniel Rosen Asst. Secretary 50 4,000

Harry J. Louis Treasurer 30 2,400

Coral Glade Co. was incorporated on November 15, 1955 as a land development company. Stockholders of record were as follows:

Name Title Number of Shares Amount Paid in

Burt Hunter President 10 $2,500

Emil Gould Secretary 5 1,250

Estelle Gould Treasurer 5 1,250

Sans Souci Co. was incorporated on November 17, 1955 as a land development and sales company. Stockholders of record were as follows: 13 Name Title Number of Shares Amount Paid in

Emil J. Gould President 7.5 $225

Estelle Gould Treasurer 7.5 225

Burt Hunter Secretary 10 300

Daniel Rosen - 5 150

On *159 March 26, 1956, Harbour Development Co. was incorporated. Its stockholders consisted of the following:

Name Voting Shares Non-voting Shares Total Subscription Price

Dorothy Meyer 10 - $750.00

Emil J. Gould 7.5 90 292.50

Estelle Gould 7.5 90 292.50

Burt Hunter 7 84 273.00

Daniel Rosen 5 60 195.00

Harry J. Louis 3 36 117.00

Sunrise Harbour, Inc. was incorporated on March 26, 1956. Its stockholders were as follows:

Name Voting Shares Non-voting Shares Total Subscription Price

Mildred Wallach 10 - $750.00

Emil J. Gould 7.5 90 292.50

Estelle Gould 7.5 90 292.50

Burt Hunter 7 84 273.00

Daniel Rosen 5 60 195.00

Harry J. Louis 3 36 117.00

Peat Corp. was incorporated on April 4, 1956 as a land development company. Stockholders of record were as follows:

Name Title Number of Shares Amount Paid in

Emil Gould Asst. Secretary

& Treasurer 9 $675

Estelle Gould - 9 675

Warren Wepman President 9 675

Dr. Nathan Schacher - 10 750

Harry J. Louis Vice President 6 450

Rose Kaplan - 9 675

Paul Burnham, Jr. Secretary 8 600

On April 6, 1956, Luxor Corp., Trenton Corp., Camden Corp., Dalton Corp., Bay Homesites, Inc. and Harbour Properties, Inc. were organized. Their stockholders were represented as follows:

Name Title Voting Shares Non-voting Amount Paid in

Shares

Estelle Gould - 7.5 90 $292.50

Emil Gould President 7.5 90 292.50

Burt Hunter Secy.-Treasurer 7 84 273.00

Harry J. Louis - 3 36 117.00

Daniel Rosen - 5 60 195.00

Various others 13 - 10 - 750.00

We *160 find it difficult to determine the value assigned to the voting and nonvoting stock. For example in Trenton Corp. Daniel Rosen, Harry Katzen and Henrietta Tauber each purchased 5 voting shares of of stock. In addition Daniel Rosen purchased 60 nonvoting shares. Yet Katzen and Tauber each paid $375 to the corporation for their stock while Rosen only paid $195.

The Taladen Co. (not docketed) was incorporated on December 17, 1958. It had issued an outstanding 25 shares of capital stock for which $2,500 was paid into the corporation. The shareholders of record were as follows:

Year Ended September 30th

Name 1959 1960 1961 1962 1963 1964

Emil J. Gould 6 4 4 2 2 2

Estelle Gould 5 4 4 2 2 2

Katherine Freedman 3 3 3 3 3 3

Dennis Gould 4 5 5 5 5 5

Cathie-Ellen Bould Beber 4 5 5 5 5 5

Lauren Gould 2 3 3 3 3 3

Perley M. Noll 1 1 1 1 2 2

Robert Freeman 1 1 1

Ethel Goldstein 2 2 2

Mina Gaines 1

25 25 25 25 25 25

Darlington Manor, Inc. was incorporated on January 26, 1959 as a land development company. Stockholders of record were as follows:

Name Title Number of Shares Amount Paid in

Emil Gould President 5 $5,000

Estelle Gould Vice President & Treasurer 5 5,000

Rose G. Kaplan Secretary 15 15,000

Housing Engineers of Florida, Inc. was incorporated as a construction company *161 on August 26, 1959. Emil and Estelle Gould owned all of its capital stock for which they paid in $25,000. Emil Gould served as president. 16

Southern Rock and Fill Co. was incorporated on September 3, 1959 for the purpose of dredging, filling and grading land. Emil and Estelle Gould owned all of its capital stock for which they paid $5,000. Its president was Emil Gould.

Coral Way Land Co. (not docketed) was incorporated on September 17, 1959. Its stockholders and officers were as follows:

Name Title Number of Shares Amount Paid in

Emil Gould President 25 $7,500

Estelle Gould Secretary-Treasurer 25 7,500

Perley Noll Asst. Secretary - -

Sunrise Sales Co. (not docketed) was incorporated in 1959. Prior to that time it was a partnership which acted as sales agent for certain corporations selling land in the Sunrise Point, Sans Souci and Sunrise Harbour area. Stock interest may be reflected as follows:

Name Percentage of Stock Ownership

Gould 50

Rosen 16-2/3

Hunter 23-1/3

Rosen 10

All corporate petitioners filed their Federal income tax returns for the years here in issue with the district director of internal revenue at Jacksonville, Florida. Their methods of accounting and taxable years to the *162 17 extent ascertainable may be reflected as follows:

Petitioner Taxable Year Method of Accounting

Emil J. and Estelle Gould December 31 cash

Sunrise Properties, Inc. February 28, (29) accrual

Sans Souci Co. February 28 (29) accrual

Peat Corp. December 31 accrual

Harbour Development Co. March 31 -

Sunrise Harbour, Inc. February 28 (29) -

Bay Homesites, Inc. May 31 -

Dalton Corp. August 31 -

Harbour Properties, Inc. August 31 -

Luxor Corp. July 31 -

Trenton Corp. September 30 -

Coral Glade Co. March 31 accrual

Coral Way Land Co. (not docketed) - accrual

Darlington Manor, Inc. December 31 accrual

Sunrise Sales Co. (not docketed) - -

Housing Co. of Florida

(not docketed) - -

Taladen (not docketed) September 30 cash

Housing Engineers of Florida, Inc. April 30 cash

Southern Rock and Fill Co. March 31 cash

The following recorded conveyances of real estate are involved in these cases:

Dates Grantor Grantee Property Lot or Tract Sales Price

May 5, 1945 Athene H. Pitt Emil J. Gould Sans Souci Tract A, B & C Sunrise Point 15

June 1, 1946 Tahiti Reality Corp. Emil J. Gould Sunrise Harbour Lots 1-3, 14-16, Tract A

Carrie R. Sapiro Sunrise Point 1, 2, 6, 10-17, 19-23 Tract B

Sans Souci 14 *163 1-7, 9-15, 18-20 Tract C

1-4 Tract D

1-14, 16, 17 Tract E

1-21 Tract F

May 25, 1955 Carrie R. Sapiro Emil J. Gould Sunrise Harbour Lots 1-3, 10, 11, 14-16 Tract A Sunrise Point 16 Partition

Sunrise Point 1, 2, 6, 10 (east),

Sans Souci 11-17, 19-23 Tract B

1-7, 9-15, 17-20 Tract C

1-4 Tract D

Tract 5, 6 (west), 7 (east) Sunrise Harbour 17

Tract 2, 3 & 4 A & C Sans Souci

May 25, 1955 Emil J. Gould Carrie R. Sapiro Sunrise Harbour Lots 1-14, 16 & 17 Tract E Sunrise Point Partition

Sunrise Point 1-21 Tract F

Tract 4, 6 (east), 7 (west) Sunrise Harbour 18

out Lots 6-21, 1-26 Block 1

1-83 Block 2

1-6 Block 3

August 31, 1955 Carrie R. Sapiro Burt Hunter Sunrise Harbour Lots 1-14, 16 & 17 Tract E Sunrise Point $315,360.00

Harry Louis Sunrise Point 1-21 Tract F

Daniel Rosen Tract 4, 6 (east), 7 (west) Sunrise Harbour

out Lots 6-21, 1-26 Block 1

1-83 Block 2

1-6 Block 3

Dates Grantor Grantee Property Lot or Tract Sales Price

August 31, 1955 Emil J. Gould Sunrise Properties, Inc. Sunrise Point Lots 1-3, 10, 11, 14-16 Tract A Surrise Point $600,000

Sunrise Harbour 1, 2, 6, 10 (east),

Sans Souci 11-14, 19-23 Tract B

1-7, 9-15, 1720 Tract C

1-4 Tract D

Tract 7 (east) Sunrise Harbour

Tract 2, 3& 4 Sans Souci 340,000

A, B & C

November 17, 1955 Sunrise Properties, Inc. Sans Souci Co. Sans Souci Tract 2, 3 & 4, Sans Souci

A B & C

April 1, 1956 Sylvania Corp. 19 *164 Coral Glade Co. Coral Glade Heights 240,000

April 10, 1956 Burt Hunter Peat Corp. Sunrise Point Lots 1-14, 16, 17 Tract E Sunrise Point 585,000

Harry Louis Sunrise Harbour 1-21 Tract F

Daniel Rosen out Lots 6-21, 1-26 Block 1 Sunrise Harbour

1, 2, 6-79, 80 (east) Block

1-6 Block 3

April 10, 1956 Sunrise Properties, Inc. Peat Corp. Sunrise Harbour Tract 7 (east) Sunrise Harbour 128, 500

April 11, 1956 Burt Hunter Peat Corp. Sunrise Harbour Lots 3, 4, 5, 80, (west) Block 2 Sunrise harbour 128,500

Harry Louis 81-83

Daniel Rosen

April 11, 1956 Peat Corp. 20 Burt Hunter Sunrise Harbour Tract 7 (east) Sunrise Harbour 125.000

Harry Louis

Daniel Rosen

April 11, 1956 Peat Corp. Harbour Development Co. Sunrise Point Lots 9-14, 16, 17 Tract E 26,750

April 11, 1956 Peat Corp. Sunrise Harbour, Inc. Sunrise Point Lots 1-8 Tract E 26,750

Dates Grantor Grantee Property

May 10, 1957 Peat Corp. Harbour Development

Co. Sunrise Harbour

May 10, 1957 Peat Corp. Harbour Properties,

Inc. Sunrise Harbour

May 10, 1957 Peat Corp. Camden Corp. Sunrise Harbour

May 10, 1957 Peat Corp. Trenton Corp. Sunrise Harbour

May 10, 1957 Peat Corp. Luxor Corp. Sunrise Harbour

May 10, 1957 Peat Corp. Dalton Corp. Sunrise Harbour

May 10, 1957 Peat Corp. Bay Homesites, Inc. Sunrise Harbour

May 10, 1957 Peat Corp. Sans Souci Co. Sunrise Harbour

May 10, 1957 Peat Corp. Sunrise Harbour, Inc. Sunrise Harbour

August 22, 1957 Sylvania Corp. 22 Coral Glade Co. Coral Gardens

April 29, 1959 Housing Co. of

Florida 23 Darlington Manor, Inc. Darlington Manor

November 10, 1959 Coral Glade Co. Coral Way Land Co. Coral Gardens

Dates Lot or Tract Sale Price

May 10, 1957 Lot 11 Block 1 $122,500

13, 22, 31, 40, 48, 56, 64, 72,

80, 88, 96 21 Block 2

May 10, 1957 Lots 10, 15 Block 1 148,500

2, 9, 14, 24, 32, 38, 41, 57, 65,

73, 81, 89, 97 Block 2

May 10, 1957 Lots 9, 16 Block 1 149,500

3, 8, 15, 25, 33, 42, 50, 58, 66,

74, 82, 90, 98 Block 2

May 10, 1957 Lots 8, 13, 17 Block 1 144,250

7, 16, 26, 34 43, 51, 59, 67, 75,

83, 91, 99 Block 2

May 10, 1957 Lots 1, 7, 14, 18 Block 1 144,500

6, 17, 27, 35 44, 52, 60 68, 76,

84, 92 100 Block 2

May 10, 1957 Lots 2, 6, 12,19 Block 1 141,500

5, 19, 28, 36 45, 53, 61, 69 77,

85, 93, Block 2

May 10, 1957 Lots 4, 5, 20 Block 1 142,500

4, 10,20, 29 37, 46, 54, 62 70,

78, 86, 94, 102 Block 2

May 10, 1957 Lots 11, 18, 23, 39 Block 2 36,000

May 10, 1957 11, 12, 21, 30 47, 49, 55, 63 71,

79, 87, 95 Block 2 111,500

August 22, 1957 670,000

April 29, 1959 587,500

November 10, 1959 Lots 1-20 Block 1 1-29 Block 2 24 507,150

1-24 Block 3 1-20 Block 4

1-5 Block 4A 1-22 Block 5

1-26 Block 6 1-15 Block 7

*165

22

Valuation

Three individuals appraised part of all of the property in issue. Robert R. Coopman and Theodore C. Slack represented the respondent and Marion C. McCune represented the petitioners. Their valuations may be reflected as follows: 23

Date of Grantor Grantee Property in Issue 25

Transfer

8/31/55 Gould Sunrise Properties, Block A, B, C & D Sunrise Point

Inc. Sans Souci

Block 7 Sunrise Harbour

1/17/55 Sunrise, Inc. Sans Souci Co. San Couci

4/1/56 Sylvania Coral Glade Co. Coral Glade Heights

4/10/56 Hunter Peat Corp. Block E & F Sunrise Point

Louis Block 1, 2&3 Sunrise Harbour

Rosen (less 7 lots in Block 2)

4/11/56 Hunter Peat Corp. 7 lots Block 2

Louis

Rosen

8/22/57 Sylvania Corp.

& Gould Coral Glade Co. Coral Gardens

4/29/59 Gould Darlington Manor, Stock of Housing Co. of Florida

Inc. (containing Darlington Manor

subdivision)

1/10/59 Coral Glade Co. Coral Way Land Co. 161 lots in Coral Gardens

*166 Date of McCune Coopman Slack Value Claimed

by Petition

Transfer

8/31/55 $600,000 $294,000 $344,350 $600,000

1/17/55 not appraised 26 166,400 156,000 340,000

4/1/56 not appraised 100,000 110,000 240,000

4/10/56 not appraised 283,500 585,000

341,300

4/11/56 not appraised 11,000 128,500

Rosen 302,500 330,000 670,000

8/22/57 632,500 27 302,500 330,000 670,000

4/29/59 not appraised 334,250 358,125 587,500 28

1/10/59 not appraised 507,150 595,700 507,150

Loans involved in the instant cases may be reflected as follows:

Date of Lender Borrower Amount of Interest

Loan Loan Rate%

8-31-55 Emil Gould Sunrise Properties, Inc. 550,000 5Purchase money mortgage.

8-25-55 Daniel Rosen Sunrise Properties, Inc.

note payable 38,000 10

9-23-55 Emil Gould Sunrise Properties, Inc. 38,000 10

11-17-55 Sunrise Properties, Inc. Sans Souci Co. 340,000 5

11-17-55 Emil Gould Sans Souci Co. 10,000 10

11-17-55 Daniel Rosen Sans Souci Co. 10,000 10

8-31-55 Carrie Sapiro Hunter, Louis & Rosen 240,000 5

4-10-56 Daniel Rosen, Burt

Hunter and Harry J.

Louis Peat Corp. 330,000 5

4-10-56 Sunrise Properties, Inc. Peat Corp. 13,500 5

4-10-56 Hunter, Louis & Rosen Peat Corp. 125,000 5

6-1-56 Dr. Nathan Schacher Peat Corp. 12,500 10

9-56-

12-64 Gould Peat Corp. 783,500 10

4-11-56

5-10-57 Peat Corp. Harbour Properties, Inc. 147,500 5

Luxor Corp. 143,500 5

Trenton Corp. 143,000 5

Sunrise Harbour, Inc. 136,000 5

Camden Corp. 148,500 5

Dalton Corp. 140,500 5

Bay Homesites, Inc. 141,500 5

Harbour Development

Corp. 147,000

Total 1,147,500

3-23-56 Gould Coral Glade Co. 1,000 ?Open account

3-23-56 Hunter Coral Glade Co. 1,000

4-1-56 Gould Coral Glade Co. 235,000 5

8-22-56 Gould Coral Glade Co. 590,000 5

8-22-57 Gould Coral Glade Co. 5,000 5

5-18-61 Hunter Coral Glade Co. 125,000 10

9-17-61 Gould Coral Way Land Co. 37,500 4

11-10-59 Coral Glade Co. Coral Way Land Co. 457,150 6

4-14-59 Rose Kaplan Darlington Manor, Inc. 15,000 5

4-29-59 Gould Darlington Manor, Inc. 572,500 6

Prior to

4-59 Carrie Sapiro Gould 125,000 10

4-29-59 Gould Darlington Manor, Inc. 572,500 6

224,500 4

4 to 6-60 Gould Darlington Manor, Inc. 9,000 -

6-15-59 Sapiro Darlington Manor, Inc. 200,000 10Note

1961 Hunter Darlington Manor, Inc. 147,000 10

7-1-59 Gould Phillip Shore 468,500 5

2-14-63 Gould Ralph Edelstein 200,000 10

3-15-57 Carrie Sapiro Emil Gould 150,000 -

2-29-56

to

2-24-59 * Gould Housing Co. of Florida 379,500 6

*167 Date of Loan Security

8-31-55 Purchase money mortgage.

8-25-55 Secured

9-23-55 Secured note payable

11-17-55 Agreement for Deed

11-17-55 Unsecured note payable

11-17-55 Unsecured note payable

8-31-55 Purchase money mortgage

4-10-56 Purchase money mortgage

4-10-56 Purchase money mortgage

4-10-56 Note payable

6-1-56 Note payable

9-56-

12-64 Notes payable

4-11-56

Agreements for Deed

5-10-57

Agreement for Deed

3-23-56 Open account

3-23-56 Open account

4-1-56 Purchase money mortgage

8-22-56 Purchase money mortgage

8-22-57 Note payable

5-18-61 Note payable

9-17-61 Note payable

11-10-59 Purchase money mortgage

4-14-59 Note payable

4-29-59 Note payable to Gould for his stock in

Housing Co. of Florida with mortgage

Prior to 4-59 Mortgage note secured by land of

Housing Co. of Florida

4-29-59 Second mortgage

Second mortgage

4 to 6-60 Open account

6-15-59 Note

1961 -not stated-

7-1-59 Purchase money mortgage

2-14-63 Purchase money mortgage

3-15-57 Mortagage on Clin Clara property

2-29-56 to

2-24-58 * Unsecured notes payable

*168

Gould's History in Real Estate (exclusive of the property in issue)

From 1936 to the period in question Gould had participated in almost every aspect of the real estate business either in Florida or, during World War II in Portsmouth, Virginia. This included buying and selling land, building and selling houses and apartment houses.

Gould very often carried out the above activities under the trade name Housing Engineers of Florida, Inc., which at various times was organized as a sole proprietorship, partnership or a corporation. He also owned and controlled Ocean View Co. and Bay View Co., two home construction corporations. Gould was associated with several building and real estate partnerships, including Coral Homes, Tru Gems, Ltd. (in North Carolina), and Housing Associates of Florida.

In the early 1950's Gould was stricken with ulcerative colitis, a chronic disease of the intestinal tract, which became progressively worse. In 1955, Gould's condition required his hospitalization. As a result of the colitis he was advised by his doctor to restrict his work schedule to 4 half-days per week.

In the building and real estate field Gould was a member, officer and director of the *169 Builders Assn. of 26 South Florida and the Florida Home Builders Assn. He was a director and is currently an honorary life member of the national board of directors of the National Assn. of Home Builders. He was also Chairman of the Tax Studies Committee of the National Assn. of Home Builders. Gould spoke before various real estate groups on different aspect of land and real estate as well as the effect of certain income tax provisions on the home building industry. Gould was knowledgeable in Federal tax matters and was well known in the real estate field.

Acquisitions and Dispositions in issue:

The Sunrise properties 29

On May 7, 1945 Gould purchased property known as Sans Souci, in Coral Gables approximately 7 miles south of downtown Miami. Approximately 1 year later, on June 1, 1946 he joined with Carrie R. Sapiro (hereinafter referred to as Sapiro), the wife of a business associate, Samuel T. Sapiro, 30 *170 to purchase adjacent properties known as Sunrise Point and 27 Sunrise Harbour. Gould and Sapiro took title to the three parcels as tenants in common. 31

At the time of the acquisition of the Sunrise properties Gould was actively engaged in home building at Sylvania Heights, Bay View and Ocean View Heights, which were closer to downtown Miami or subject to more extensive development. Therefore, Gould did not consider Sunrise ready for immediate development. A balance sheet entitled "Emil & Estelle Gould T/A Housing Engineers of Florida Balance Sheets" for the fiscal year ended August 31, 1949, listed the Sunrise properties under the heading "Investments." Prior to August 31, 1955, neither Gould nor Sapiro attempted to develop or improve this property. It was not listed with brokers or otherwise offered for sale.

Description of Property

In General

The property, specifically Sunrise Point, *171 Sunrise Harbour and Sans Souci, is located in Coral Gables, Dade County, Florida, south of an area of the city of Miami known as Coconut Grove. It is bordered on the north by North Prospect Drive, on the west by Ingraham Highway, on the east by Biscayne Bay and on the south by Coral Gables Waterway.

Running north and south through the property is Douglas Road.

Prior to and during 1955 the property was largely undeveloped due in large part to the topography of the land which was near, and in many instances, below sea level. (The land west of Douglas Road was higher in elevation than that to the east.) Portions of the real estate were mangrove swamp 32 and a major section of the land was subject to flooding.

There were several homes in the area west of Douglas Road, and during the time in issue considerable construction was taking place in Dade County. However, the major portion of this construction was located west of the Sunrise properties since there was a sufficient supply of undeveloped land which could be subdivided without extensive fill requirements.

Sunrise Points

As of May 25, 1955, Sunrise Point was a *172 subdivision consisting of six tracts or blocks (A through F) 33 which were divided into 112 lots. Gould and Sapiro owned 83 of 29 these lots. They were located south of Sans Souci and north of Sunrise Harbour. The property was zoned entirely for single family dwellings. The topography of the land indicated an elevation of from 15 to 20 feet in the extreme western area adjacent to Ingraham Highway to a low of approximately 4 feet on the eastern and near Biscayne Bay. (Of the land Gould and Sapiro 3wned in this subdivision, only one lot in Block F touched the Bay.)

Utilities were available in this area, streets were paved making the property easily accessible and several houses had been constructed on the property west of Douglas Road. The land was however virtually unimproved but was subject to improvement.

As of May 25, 1955, Sans Souci was the name applied to a former subdivision consisting of approximately 20.8 acres for which a plat had been recorded in the 1920's but which had subsequently been revoked. As a result, lot lines were eradicated and the *173 property could be sold only as tracts (1, 2, 3, and A, B, and C). It was located immediately north of Sunrise Point and was subsequently platted to denote 5 sections which were divided into 69 lots. The larger portion of the property was situated east of Douglas Road. Elevation of this section ran from sea level at Biscayne Bay 34 to 30 5 feet at Douglas Road. The area west of Douglas Road ran from 5 feet to a maximum of 15 feet.

The property was unimproved, covered with pine trees. Like Sunrise Point, it was easily accessible. Utilities were available and the property was zoned exclusively for single family dwellings.

Sunrise Harbour

Sunrise Harbour, the largest of the three subdivisions containing approximately 70 to 75 acres of land, was located to the immediate south of Sunrise Point. As of May 25, 1955, it was divided into seven tracts or blocks (noted as 107) with Blocks 1, 2 and 3 containing a total of 115 lots. Block 4 through 7 were not further subdivided and contained a total 18.07 acres of land. The property was subsequently *174 replatted at which time the blocks were reduced to a total of five, Block F of Sunrise Point was included, and the number of lots was increased to 122.

Topographically a small section of the land, located mainly in Block 1, was above sea level running from 2 feet to a higher elevation at the extreme western end adjacent to Ingraham Highway. However, substantially all of the property was at or below sea level with more than 7 acres being a part of Biscayne Bay and the remaining 60 or so acres being mangrove swamp. 31

While the major portion of the property was accessible by road, a sizable area was approachable only by boat. Development was impossible without extensive dredging, filling and the construction of a sea wall. Utilities were available. As of May 25, 1955 the property was zoned as follows: 35 (1) Lots 1-9, Block 1

Lots 6-79, Block 2 single family residence

Lots 1-6, Block 3

(2) Lots 10-26, Block 1

Lots 1-5, Block 2 multifamily dwelling

Lots 80-83, Block 2

Block 7

Block 4,5 and 6 business

By deeds dated May 25, 1955, and recorded August 31, 1955, Gould and Sapiro partitioned their interest in the *175 Sunrise properties.

Pursuant to a deed from Sapiro, as grantor, to Gould, as grantee, Gould obtained the Sans Souci property, 46 lots in Blocks A-D of Sunrise Point (all situated west of Douglas Road) and Block 5, the western portion of 6 and the eastern portion of block 7 in Sunrise Harbour which consisted of approximately 10 acres zoned for commercial and multifamily use. (See page 18 to determine the precise lot and tract allocation.)

Pursuant to a deed from Gould as grantor to Sapiro, as grantee, Sapiro received 37 lots in Blocks E and F of Sunrise Point (all located east of Douglas Road), the 115 lots in Blocks 1, 2 and 3 and Tract 4, the eastern part of Tract 6 and the western portion of tract 7 all in Sunrise Harbour. Twenty-six of the 115 lots in the first three blocks were zoned for multiple dwelling, Blocks 4 and 6 were zoned for business and Block 7 was zoned for multi-family housing. The three latter tracts contained approximately 8 acres in area.

The above allocation was accomplished by a division of the property between the parties along the lines determined by them to be both equitable and equal in value. Each individual felt competent to determine a proper allocation *176 and each believed he had received one-half the value of the entire tract. No attempt was made to verify this allocation through the use of a independent appraisal or offers to buy from unrelated independent third parties.

Sale by Sapiro to Hunter, Louis and Rosen

Burt Hunter (hereinafter referred to as Hunter) is, and during the times in issue, was a resident of Miami, Florida. During the early and mid-1950's Hunter and Harry J. Louis (hereinafter referred to as Louis) owned and managed Concrete Structures, Inc., a corporation which 33 sold precast concrete joists. Both Hunter and Louis had little, if any, knowledge of the real estate and home building field.

Gould, a social acquaintance of Hunter's, spoke of possible real estate investments. It was in such a situation that Gould informed Hunter of the impending partition of the Sunrise properties and of Sapiro's desire to sell his interest in such property.

Hunter, during the summer of 1955, approached Sapiro with an offer to purchase his property. The price of approximately $315,000 36 was set by Sapiro and accepted by Hunter without negotiation. The parties entered into a contract which required $75,000 cash at closing *177 and a note of $240,000 secured by a purchase money mortgage. Hunter, unable to raise all the necessary cash, contacted Louis who with a New York friend, Daniel Rosen (hereinafter referred to as Rosen), contributed the additional required cash. Rosen was an attorney who knew little or nothing about the real estate business.

Hunter, Louis and Rosen consummated the purchase of Sapiro's property on August 31, 1955. Neither Sapiro, 34 nor Hunter, Louis or Rosen were related to Gould or to each other.

Sale by Gould to Sunrise Properties, Inc.

During this same period of time Hunter, representing Louis, Rosen and himself, and Gould discussed and agreed upon the formation of a corporation and the conveyance of Gould's Sunrise property to the corporation with the intention of undertaking development.

In this regard Sunrise Properties, Inc. (hereinafter sometimes referred to as Sunrise, Inc.) was incorporated on August 11, 1955. The shareholders and officers were as follows:

Name Title Number of Shares Amount Paid in

Emil Gould President 75 $6,000

Hunter Vice-President & Secy. 70 5,600

Rosen Asst. Secretary 50 4,000

Louis Treasurer 30 2,400

On *178 August 10, 1955, a deposit receipt agreement was prepared pursuant to which Gould agreed to convey 37 to Sunrise, Inc. his 46 lots in Sunrise Point, all of Sans Souci and the eastern portion of Tract 7 in Sunrise Harbour (Gould retained his interest in Tract 5 and the westerly portion of 35 Tract 6) 38 for a total consideration of $650,000 ($100,000 in cash and a note covering the remaining $550,000 with interest payable at 5 percent). Subsequently on August 25, the parties amended this agreement 39 *179 to reflect a reduced purchase price of $600,000 with a cash down payment of $50,000. This alteration was in response to an appraisal prepared by Adrain and Marion Clyde McCune (hereinafter referred to as McCune) who valued the property in issue at $600,000.

The sale was consummated on August 31, 1955 with the execution of a warranty deed from Gould to Sunrise, Inc. for a total consideration of $600,000; $50,000 in cash and an installment note representing the remaining $550,000 with interest payable semiannually at 5 percent, secured by a purchase money mortgage. 40 The principal and interest 36 due and paid on the note may be reflected as follows: 41

Payable Amount Due Fiscal Year Paid Principal Paid Interest Paid Balance Due

8/31/56 $50,000 2/29/56 $1,575 $14,548.16 $548,425

2/28/57 " 2/28/57 217,790 22,957.94 330,635

8/31/57 "

2/28/58 " 2/ 28/58 35,415 10,800.16 295,220

8/31/58 "

2/28/59 " 2/28/59 35,505 9,215.81 259,715

8/31/59 "

2/28/60 " 2/29/60 93,735 16,022.81 165,980

8/31/60 150,000

$ 550,000

2/28/61 146,595 19,385

2/28/62 4,500 14,885

2/28/63 3,500 (unpaid) 42 *180 11,385

Interst on the note was waived by Gould pursuant to a letter dated August 31, 1959. On August 24, 1960, Gould agreed to extend the maturity date of the obligation for a 3 year period. As of August 31, 1963 the unpaid balance on the note was $4,885. 37

Gould treated the transfer of the realty to Sunrise, Inc. as a installment sale on his 1955 Federal income tax return as follows:

Contract price 8/30/55 $600,000.00

Cost 1945 and 1946 $61,914.53

Expenses 660.00 -62,574.53

Long Term Capital Gain $537,425.47

1955 collections $50,000.00

Percent of profit 89.5709%

1955 Long Term Capital Gain $44,785.45

Activities of Sunrise Properties, Inc.

The bylaws of Sunrise, Inc. required the affirmative vote of persons owning 95 percent of the outstanding shares to pass upon matters appropriate for stockholders' meetings. Each shareholder was entitled to representation on the board of directors and unanimity of directors was required for the board to pass a resolution.

Being the only knowledgeable person in the real estate field, Gould was employed by Sunrise, Inc. as general manager *181 for a 5 year period. (He supervised the activities of all the corporations hereinafter mentioned.) Lot prices were theoretically determined by the shareholders with Gould having the authority to vary those prices by up to 10 percent.

On August 25, 1955, Rosen advanced $38,000 to Sunrise, Inc. in exchange for a note, guaranteed by the other shareholders and secured by pledge of their stock in the 38 corporation. The loan payment was due 5 years from the date of issue and carried an interest rate of 10 percent per annum. The proceeds of the loan were applied by Sunrise, Inc. to the cash down payment in the acquisition of Gould's Sunrise properties.

Rosen advanced the funds to Sunrise as a loan, rather than as additional capital, because Gould and Hunter did not offer Rosen additional equity but rather requested to borrow money. Rosen considered the loan to be adequately secured and the interest rate to be a better yield than available elsewhere.

Sunrise, Inc., on September 23, 1955, needing additional funds to improve the land for sale, obtained $19,000 each from Emil and Estelle Gould. The transaction was rendered on the corporate books as a loan with terms identical to those *182 of the Rosen transaction. Sunrise, Inc. refused a loan offer of $50,000 from Rosen as Gould's repayment terms were more beneficial to the corporation. The Gould loans were repaid in full by the close of the corporate year ended February 28, 1961, in accordance with the terms of the agreement.

On the same day, namely September 23, Estelle Gould purchased 75 shares of Sunrise, Inc. stock for a total consideration of $6,000, bringing the total number of 39 shares outstanding to 300, the division of which may be reflected as follows:

Shareholder Number of Shares Paid in Capital

Emil Gould 75 $6,000

Estelle Gould 75 6,000

Hunter 70 5,600

Rosen 50 4,000

Louis 30 2,400

Estelle Gould's role in Sunrise, Inc., as well as other corporations in which she owned stock, was passible.

As of September 23, 1955, the capital and debt structure of Sunrise, Inc was as follows: Capital Stock $24,000

Purchase money mortgage due Gould $550,000

Notes payable - Goulds 38,000

Note payable - Rosen 38,000

$626,000

Within a relatively short period of time after its incorporation Sunrise, Inc. initiated a sales program in an attempt to sell its lots in Sunrise Point. With the incorporation of Sans Souci Co. (infra at 43) at about *183 this same period of time a partnership, Sunrise Sales Co., was formed and designated exclusive sales agent for all of the Sunrise properties held by the various corporations. The partnership interest of Sunrise Sales may be reflected as follows: 40

Partner Percentage of Interest

Gould 50

Rosen 16-2/3

Hunter 23-1/3

Louis 10

This organization was incorporated in 1959 with the same percentages of stock ownership.

The first lots in Sunrise Point were not sold until 1956. By 1960 however the corporation through Sunrise Sales had sold 32 of the 46 lots available. 43 *184 Four of the remaining 14 were dedicated to park land while the other 10 were adversely affected by their close proximity to garden apartments. As a result of these sales Sunrise, Inc. was eventually (though not timely) able to repay substantially all of the outstanding obligation owed Gould( supra, at 36 ).

Hunter, Louis and Rosen received neither salary nor dividend distributions from Sunrise.

Sale by Sunrise Properties, Inc. to Sans Souci Company

Sunrise Inc. owned, in addition to the Sunrise Point lots, the Sans Souci tracts. Since the former subdivision 41 plat had been revoked it was incumbent upon Sunrise, Inc. to prepare and file a new plat prior to any lot sales. In addition, this land, like Sunrise Point, needed improvements with regard to drainage, roads, etc. (Note, also, Blocks A&D of Sunrise Point were west of Douglas Road with an elevation of 5 to 20 feet while Tracts B and C of Sans Souci were east of Douglas Road with an elevation of sea level to 5 feet.)

Gould, Hunter and Rosen with Louis abstaining decided to convey this property a new corporation wherein the land would be improved, platted and then sold. In this regard Sans Souci Co. was incorporated on November 17, 1955. The shareholders and officers of the corporation were as follows:

Name Office Number of Shares Paid in Capital

Emil Gould President 7.5 $225

Estelle Gould Treasurer 7.5 225

Hunter Secretary 10 300

Rosen - 5 150

Immediately *185 following incorporation Sunrise, Inc. executed an "Agreement for Deed" with respect to the Sans Souci property which conveyed such property to Sans Souci Co. The stated purchase price was $340,000, $7,275 down and the balance of $332,725 in eight semiannual installments of $25,000 and a final installment of $132,725 due May 17, 1960, together with 5 percent interest on the unpaid balance.

The above noted agreement also contained a release clause pursuant to which Sunrise, Inc. agreed to deliver deeds to lots designated by San Souci Co. upon payment of specified prices. The agreement was duly recorded December 28, 1955.

Payments by Sans Souci Co. to Sunrise, Inc. pursuant to the "Agreement for Deed" were as follows:

Fiscal Year Ended February 28 (29) Principal Interest

1956 $ 8,850 44 $ 20.64

1957 75,915 16,379.17

1958 66,510 11,783.99

1959 37,005 8,818.22

1960 68,100 7,416.33

1961 81,275 2,356.19

1962 -0- 443.22

1963 500 -0-

1964 1,845 104.96

$340,000

Sunrise, Inc. reported the transfer as an installment sale treating the gain recognized as ordinary income from the sale of inventory. The pertinent figures include:

Installment sales price $340,000.00

Cost 320,191.59

Gross Profit (5,826%)

19,808.41

Activities *186 of Sans Souci Company

On the day of incorporation, November 17, 1955, Gould and Rosen each transferred $10,000 to Sans Souci Co. in 43 exchange for notes due 5 years from the date of issue, together with interest of 10 percent per annum payable quarterly. The proceeds of the loans were applied to the down payment due Sunrise, Inc. and necessary improvements on the property.

As of November 17, Sans Souci's capital and debt structure was as follows:

Capital stock $900

Contract payable to Sunrise, Inc. $332,725

Notes payable:

Gould 10,000

Rosen +10,000 $352,725

The $20,000 of notes payable was unsecured while the contract payable was secured by Sunrise, Inc's retention of legal Co. appointed Sunrise Sales Co. as exclusive sales months later on January 5, 1956, Gould was designated general manager of Sans Souci Co. The salary for such position was paid to Housing Engineers of Florida, a corporation wholly owned by Gould. On this same day a new plat, creating 69 lots in 5 blocks (1-5), was prepared and recorded February 16 of the same year. The necessary improvements were completed and lot sales began.

All but one of the 69 lots were sold by 1960. Sans Souci Co. reported these sales on *187 the installment method which reflected a gross profit of from 33 to 40 percent. As it sold lots Sans Souci made payments to Sunrise, Inc. in satisfaction of its obligation which was fully paid by the end of the 1965 fiscal year. See supra, at 42 . 45

Neither Hunter nor Rosen received salary or dividend distributions from Sans Souci Co.

Peat Corporation

Peat Corp. was organized on April 4, 1956 as a land development company. Stockholders of record were as follows:

Name Title Number of Shares Amount Paid in

Emil Gould Assistant Secretary

& Treasurer 9 $675

Estelle Gould - 9 675

Warren Wepman President 9 675

Dr. Nathan Schacher - 10 750

Harry J. Louis Vice President 6 450

Rose Kaplan - 9 675

Paul Burnham, Jr. Secretary 8 600

Warren Wepman is the son of Gould's attorney, Herman Wepman. Dr. Nathan Schacher is Rosen's brother-in-law. Rose Kaplan is Hunter's mother.

On April 10, 1956, Hunter, Louis and Rosen conveyed to Peat Corp. the 37 lots in Block E and F of Sunrise Point (east of Douglas Road), Lots *188 1-26 of Block 1, Lots 1, 2, 6-79, eastern portion of Lot 80 in Block 2 and Lots 1-6 of Block 3, all in Sunrise Harbour. The transaction was reported as a sale with a total purchase price of $855,000 consisting of $15,000 in cash, assumption of a mortgage of $240,000 payable to Sapiro, the initial seller, and the issuance of a second mortgage note to the sellers in the amount of $330,000.

On the same day Peat Corp. acquired from Sunrise, Inc. (which Sunrise, Inc. had initially received from Gould) the eastern portion of Tract 7 in Sunrise Harbour (which had been zoned for multifamily use) reported as a sale for a total consideration of $128,500, $3,500 in cash, assumption of an $111,500 mortgage payable to Gould and the issuance of a purchase money obligation in the face amount of $13,500. 46

The following day, April 11, 1956, Peat Corp. conveyed the eastern portion of Tract 7 in Sunrise Harbour to Hunter, Louis and Rosen and simultaneously received from them, Lots 46 3, 4, 5, 80 (west), 81, 82 and 83, Block 2 of Sunrise Harbour. 47 *190 The purchase price of the first *189 noted tract was $125,000, which consisted of the assumption by Hunter, Louis and Rosen of two mortgages, the first, in the face amount of $111,500 payable to Gould and the second totaling $13,500 with Sunrise, Inc. as mortgagee. The latter portion of real estate was conveyed to Peat for a total consideration of $128,500 consisting of $3,500 in cash and a note payable to Hunter, Louis and Rosen in the amount of $125,000. 48

Hunter, Louis and Rosen had in the two transactions of April 10 and 11 conveyed to Peat Corp. all the property initially acquired from Sapiro except Tract 4, 6 (east) and 7 (west). Upon their acquisition of 7 (east) they owned 47 Tracts 4, 6 (east) and all of 7 with Gould owning 5 and 6 (west). (The various corporations in the final outcome owned none of the unplatted tracts in Sunrise Harbour.)

The purchase money mortgage and note given by Peat Corp. to Hunter, Louis and Rosen on April 10 in the amount of $330,000 carried interest of 5 percent per annum. Twenty-five thousand dollars ($25,000) was to be paid on April 10 of each year from 1957-1960 with a final payment of $230,000 on April 10, 1961. A total of $32,200 was paid as of December 31, 1965 with an outstanding balance of $297,800. Interest was paid until *191 October 1958 at which time the three sellers waived all interest. Peat Corp. did however fully pay the $240,000 obligation owed Sapiro by the end of 1960.

As of April 11, 1956, the capital and debt structure of Peat Corp. was as follows:

Capital Stock $4,500

Notes Payable: Hunter, Louis, Rosen $330,000

" " " 125,000 $455,000

Mortgage payable: Sapiro +240,000

$695,000

All of the outstanding obligations were secured by mortgages on Peat Corp.'s real estate assets. 48

Activities of Peat Corporation

Peat Corp. held property in both the Sunrise Point and Sunrise Harbour subdivisions. It disposed of the Sunrise Point lots immediately after incorporation in the following manner:

Harbour Development Co. and Sunrise Harbour, Inc. were both incorporated on March 26, 1956 (9 days before the formation of Peat Corp.) Stockholders of record of the two corporations were as follows:

Harbour Development Co.

Name Voting Percent Nonvoting Paid-in Capital

Emil J. Gould 7.5 18.75 90 $292.50

Estelle Gould 7.5 18.75 90 292.50

Burt Hunter 7 17.50 84 273.00

Harry J. Louis 3 7.50 36 117.00

Daniel Rosen 5 12.50 60 195.00

Dorothy Meyer 10 25.00 - 750.00

40 49 *192 100.00 360 $1,920.00

The identity of Dorothy Meyer cannot be ascertained from the record.

Sunrise Harbour, Inc.

Name Voting Percent Nonvoting Paid-in Capital

Emil J. Gould 7.5 18.75 90 $ 292.50

Estelle Gould 7.5 18.75 90 292.50

Burt Hunter 7 17.50 84 273.00

Harry J. Louis 3 7.50 36 117.00

Daniel Rosen 5 12.50 60 195.00

Mildred Wallach 10 25.00 - 750.00

40 100.00 360 $1,920.00

Mildred Wallach is the sister of Hunter's accountant.

On April 11, 1956, 1 day after acquisition, Peat Corp. executed two "Agreements for Deed" pursuant to which it contracted to deliver eight lots to Harbour Development Co. and eight lots to Sunrise Harbour, Inc. The 16 lots were located in Block E of Sunrise Point and necessitated less improvement than was required in the Sunrise Harbour subdivision. The records reflected a selling price in both cases of $26,750 due in installments over a 3 year period at 5 percent interest.

Shortly thereafter (in April of 1956) Peat Corp. sold one lot in Sunrise Harbour to Ignacio Ross *193 for $7,650.

The Sunrise Harbour property required substantial improvement before it could be sold as finished lots. In this regard Gould was employed by Peat Corp. as general manager to supervise the improvement and sale of the Sunrise Harbour subdivision. In this capacity he first directed the creation of a new plat for this area which created 122 lots in two blocks (20 in Block 1 and 102 Block 2) in 50 place of the 136 lots formerly contained in Blocks 1, 2 and 3 of Sunrise Harbour and Block F of Sunrise Point. This new plat was filed May 10, 1957.

Sunrise Harbour, as noted earlier at 30, was for the most part at or below sea level. The improvements required, so as to be able to sell the lots for home building, included among other things the dredging of canals, filling of the land to raise the grade level and the construction of sea walls. Peat Corp. estimated the total cost of these improvements at $368,927.33 and added such amount to the cost basis of the property-showing a total cost of $1,082,427.33 ($585,000, plus $128,000, plus $368,927.33). 50 *194

In order to finance and construct the required improvements Peat Corp., on June 1, 1956, borrowed $12,500 at 10 percent interest from Dr. Nathan Schacher, a shareholder of Peat Corp. All interest was timely paid and the principal was repaid in 1962. It entered into an agreement with Seward Dredging Co. (hereinafter referred to as Seward Co.), a subcontractor, whereby Seward Co. agreed to finance a portion of the work being done. The corporation borrowed $150,000 from stock and LeVay. In addition, beginning in September of 51 1956, Gould began transferring funds to Peat Corp. These conveyances were treated as loans with notes being issued, maturing in 3 to 5 years with an interest rate of 10 percent. The notes payable from Peat to Gould and repayments thereon may be summarized as follows:

Calendar Year Amounts Balance End

Transferred Amounts Repaid of Year Interest Paid

1956 $ 30,000 $ None $ 30,000 $ None

1957 125,000 75,000 80,000 3,948.12

1958 71,500 37,500 114,000 5,147.92

1959 63,500 62,500 115,000 18,5 02.14

1960 97,000 78,000 134,000 4,741.80

1961 177,500 98,000 213,500 None

1962 105,000 None 318,500 33,083.20

1963 90,000 44,000 364,500 None

1964 24,000 87,500 301,000 None

1965 None 124,500 176,500 None

$783,500 $607,000

*195 Peat Corp., an accrual basis taxpayer, accrued and deducted interest on the notes issued to Gould in the following amounts:

1/1/63 Balance * $12,274.36

Net addition 37,358.69

12/31/63 Balance $49,633.05

Net addition 33,894.20

12/31/64 Balance $83,527.25

Net addition 11,095.99

12/31/65 Subtotal $94,623.24

12/31/65 $94,623.24

*Balance 1/1/63 per above 12,274.36

Erroneous debit balance on books 228.33

Accrued Interest Payable per books 1/1/63 $12,046.03

By December 31, 1967, $213,523.63 had been expended on improvements. Such improvements, though initially intended to be completed by May of 1958, were not completed until December of 1962.

Peat Corp. did not itself sell at retail the Sunrise Harbour lots. Rather on May 10, 1957, the day the subdivision was replatted and prior to the completion of the major portion of the required land improvements, Peat Corp. conveyed these lots to nine corporations which will be set out immediately below.

Harbour Development, Inc. and Sunrise Harbour, Inc. have been described above ( supra at 48 ). Sans Souci Co. has also been discussed earlier at 41.

Bay Homesites, Inc. was incorporated on April 6, 1956. Stockholders of record were as follows:

Name Voting Percentage Nonvoting Paid-in Capital

Emil J. Gould 7.5 18.75 90 $ 292.50

Estelle Gould 7.5 18.75 90 292.50

Burt Hunter 7 17.50 84 273.00

Harry J. Louis 3 7.50 36 117.00

Daniel Rosen 5 12.50 60 195.00

Perley M. Noll 10 25.00 - 750.00

40 100.00 860 $1,920.00

*196

Perley M. Noll is Gould's office manager and bookkeeper.

Camden Corp., now dissolved, was incorporated on April 6, 1956. Stockholders of record were as follows:

Name Voting Percentage Nonvoting Paid-in Capital

Emil J. Gould 7.5 18.75 90 $292.50

Estelle Gould 7.5 18.75 90 $ 292.50

Burt Hunter 7 17.50 84 273.00

Harry J. Louis 3 7.50 36 117.00

Daniel Rosen 5 12.50 60 195.00

Ethel Goldstein 10 25.00 - 750.00

40 100.00 360 $1,920.00

Ethel Goldstein is Gould's mother.

Dalton Corp. was incorporated on April 6, 1956. Stockholders of record were as follows:

Name Voting Percentage Nonvoting Paid-in Capital

Emil J. Gould 7.5 18.75 90 $ 292.50

Estelle Gould 7.5 18.75 90 292.50

Burt Hunter 7 17.50 84 273.00

Harry J. Louis 3 7.50 36 117.00

Daniel Rosen 5 12.50 60 195.00

Herman Wepman 10 25.00 - 750.00

40 100.00 360 $1,920.00

Herman Wepman was Gould's attorney.

Harbour Properties, Inc. was incorporated on April 6, 1956. Stockholders of record were as follows:

Name Voting Percentage Nonvoting Paid-in Capital

Emil J. Gould 7.5 18.75 90 $292.50

Estelle Gould 7.5 18.75 90 292.50

Burt Hunter 7 17.50 84 273.00

Harry J. Louis 3 7.50 36 117.00

Daniel Rosen 5 12.50 60 195.00

Thomas Reilly 10 25.00 - 750.00

40 100.00 360 $1,920.00

Thomas Reilly was a business associate of Hunter.

Luxor Corp. was incorporated *197 on April 6, 1956.

Stockholders of record were as follows:

Name Voting Percentage Nonvoting Paid-in Capital

Emil J. Gould 7.5 18.75 90 $292.50

Estelle Gould 7.5 18.75 90 292.50

Burt Hunter 7 17.50 84 273.00

Harry J. Louis 3 7.50 36 117.00

Daniel Rosen 5 12.50 60 195.00

Bertha Weinberg 10 25.00 - 75 .00

40 100.00 360 $1,920.00

The identity of Bertha Weinberg cannot be ascertained from the record.

Trenton Corp. was incorporated on April 6, 1956. Shareholders of record were are follows:

Name Voting Percentage Nonvoting Paid-in Capital

Emil J. Gould 7.5 18.75 90 $292.50

Estelle Gould 7.5 18.75 90 292.50

Burt Hunter 7 17.50 84 273.00

Harry J. Louis 3 7.50 36 117.00

Daniel Rosen 5 12.50 60 195.00

Henrietta Tauber 5 12.50 - 375.00

Harry Katzen 5 12.50 - 375.00

40 100.00 360 $1,920.00

The identity of Henrietta Tauber and Harry Katzen cannot be ascertained from the record.

Gould was aware of the Federal income tax benefit to be derived from the formation of multiple corporations.

The bylaws of Bay Homesites, Inc., Camden Corp., Dalton Corp., Harbour Properties, Inc., Luxor Corp. and Trenton Corp. required the affirmative vote of persons owning 95 percent of the outstanding voting stock to pass resolutions as to matters appropriate for stockholders meetings. Each *198 stockholder was entitled to be represented on the board of directors and the presence of all directors was required for a quorum. These restrictions did not apply to Harbour Development Co. or Sunrise Harbour, Inc. which had been incorporated several days earlier.

On May 10, 1957, as noted above, Peat Corp. transferred 121 of the 122 lots in Sunrise Harbour (the one remaining lot had been sold earlier to Ignacio Ross) to the nine corporations.

The transactions were treated as sales and may be reflected as follows:

Purchaser Date Number State Down

of Purchase Payment Balance Term Interest

Lots Price Rate

Bay Homesites 5/10/57 16 $142,500 $1,000 $141,500 4 5%

Dalton Corp. 5/10/57 16 141,500 1,000 140,500 4 5

Luxor Corp. 5/10/57 16 144,500 1,000 143,500 4 5

Camden Corp. 5/10/57 15 149,500 1,000 148,500 4 5

Trenton Corp. 5/10/57 15 144,250 1,250 143,000 4 5

Harbour Development

Co. 5/10/57 12 122,500 1,500 121,000 4 5

Harbour Properties,

Inc. 5/10/57 15 148,500 1,000 147,500 4 5

Sunrise Harbour,

Inc. 5/10/57 12 111,500 1,500 110,000 4 5

Sans Souci Co. 5/10/57 4 36,000 1,000 35,000 4 5

Payment of principal and interest with respect to the above noted transactions was received by Peat Corp. as follows:

Calendar Year Principal Interest

1956 $ 53,500.00 $ -0-

1957 39,450.00 7,653.13

1958 28,350.00 33,738.87

1959 98,500.00 44,580.47

1960 18,500.00 45,226.12

1961 44,000.00 39, 624.88

1962 3,500.00 5,979.10

1963 35,233.36 13,766.64

1964 51,750.00 21,801.74

1965 60,600.69 27,775.89

$433,384.05

Each *199 agreement contained a release clause providing that the purchaser could require Peat Corp. to deliver deeds to designated lots upon the purchaser's payment of the release price specified in the contract for the designated lots. They also stated that Peat Corp. covenanted and agreed to improve and develop the lots it contracted to sell "by filling the property to grade, cutting the waterways, installing a precast concrete sea wall, installing water mains, paving the roads and constructing drainage structures" in conformity with the 1957 plat. Improvements were to be completed by May of the following year.

Sunrise Sales Co. was designated the exclusive sales agent for the Sunrise Harbour lots. It conducted a unified 58 sales program on behalf of all owners of land in the Sunrise subdivisions (including Sunrise, Inc. and Sans Souci Co.) allocating a pro rata portion of the marketing costs to each.

The lots in Sunrise Harbour were sold to unrelated persons as follows:

Year Number of Lots

1956 5

1957 15

1958 23

1959 12

1960 4

1961 6

1962 1

1963 7

1964 9

1965 1

83

As

As a result of these sales Peat Corp. received principal payments of $433,384.05 by December 31, 1965. 51 *200

Peat Corp.'s inability to complete the improvements within the time limit first specified hindered the purchasing corporations' ability to sell the lots which in turn limited their ability to pay Peat Corp. In 1961 Peat Corp. granted extensions of due dates for a period of 3 years, and waivers of interest from December 31, 1960 to Camden Corp., Harbour Properties, Inc., Bay Homesites, Inc. and Trenton Corp. Extensions of due date for 3 years and waiver of interest from August 31, 1961 was granted *201 to Dalton Corp.

Peat Corp. repossessed the eight remaining lots held by Camden Corp. on December 30, 1963, in cancellation of Camden's deferred payment obligations. As of that date the fair market value of the lots was $120,902.50. Camden Corp.'s remaining asset $1,075.87 in cash, was distributed in liquidation to the corporation's shareholders pro rata. Camden was legally dissolved on June 30, 1967.

The shareholders (other than Gould) 52 received neither salary nor dividend distributions from the various corporations.

Death of Arthur Vining Davis

Arthur Vining Davis (hereinafter referred to as Davis) retired as chairman of the board of directors of Alcoa Corp. and moved to Dade County, Florida, in the early 1950's. At that time, he purchased a great deal of unimproved property in the Miami area in order to engage in large scale land development activities. In 1952, he acquired a tract now known as Gables Estates, situated 1 mile south of Sunrise Harbour, on Biscayne Bay. Because the Gables Estates property was lower in elevation than *202 Sunrise Harbour, construction of lots required more extensive dredging and larger quantities of fill, resulting in wider waterways. In addition, the lots in Gables Estates were more irregularly shaped and larger in size than those in Sunrise Harbour, making Gables Estates, in Gould's opinion, "the most outstanding subdivision in Dade County."

Davis died at the end of 1962. Lot prices in Gables Estates after his death ranged from a low of $14,000 to a high of $65,000. The major number of these lots, however, was priced between $16,000 and $22,000.

Prior to Davis' death lot prices in this subdivision were somewhat higher. The reason for the reduction in price cannot be ascertained with certainty from the record. Further, we cannot determine the effect of this reduction on Sunrise Harbour sales. 53

Coral Glade Heights and Coral Gardens Subdivisions

General

On December 1, 1950, Gould, through Sylvania Corp., a nominee, acquired 70 acres of land from John Post (hereinafter referred to *203 as Post) for a total consideration of $40,047. Approximately 1 year later Gould, again through a nominee, Herman Wepman, his attorney, acquired 80 acres of land from P. H. Koblegard (hereinafter referred to as Koblegard) for $68,000. (Sixteen days later Wepman conveyed his interest in the property to Gould.) Gould, prior to 1956, did not attempt to improve or develop these properties.

The 150 acres is located approximately 5.5 miles west of downtown Coral Gables and about 10 miles southwest of Miami. The northern portion of the property borders on Coral Way, the western boundary is 97th Avenue, the southern nexus is S.W. 34th Street. Running through the property is S.W. 32nd Street. South of this street is situated 40 of the 150 acre tract. It is commonly referred to as the Coral Glade Heights subdivision. The 110 acres located north of 32nd Stree is referred to as Coral Gardens. 54

During the period in issue, 1956 and 1957, the property was unimproved with scattered trees, shrubs and grass located thereon. The adjacent streets were paved *204 and the property's elevation was approximately 8 feet. Utilities were located in the area and water was being supplied to nearby developments. Sewage facilities were available to Coral Glade Heights in the form of septic tanks in 1956 while sewers were made available to Coral Gardens during 1957. The property was initially zoned for agricultural purposes but was plated during the late fifties for single family dwellings. The plat for Coral Glade Heights was recorded December 26, 1956, creating 160 lots. The Coral Gardens plat recorded May 14, 1959 contained 337 lots with approximately 20 acres zoned for a school site.

During Gould's hospitalization in 1955 he received an offer to sell Coral Glade Heights from Thomas Ruddy. Gould accepted the offer but the sale was never consummated due to the buyer's loss of financing. The proposed sale price was approximately $5,000 per acre.

Shortly thereafter Gould decided to undertake development and sale of the tract. In this regard he organized Coral Glade Company on November 16, 1955. Stockholders of record were as follows:

Name Title Shares Amount Paid-in

Hunter President 10 $2,500

Emil Gould Secretary 5 1,250

Estelle Gould Treasurer 5 1,250

On *205 April 1, 1956, Coral Glade Co. acquired Coral Glade Heights from Gould by the delivery of a warranty deed from Sylvania Corp., as nominal grantor. The transaction was treated as a sale with a purchase price of $240,000 paid $5,000 in cash and a note secured by a purchase money mortgage covering the remaining $235,000, payable as follows:

Due Date Amount

April 1, 1957 $ 25,000.00

April 1, 1958 25,000.00

April 1, 1959 25,000.00

April 1, 1960 25,000.00

April 1, 1961 135,000.00

Interest was payable at a rate of 5 percent per annum. The mortgage provided for partial releases on each payment of $6,500.

Payment of principal on the $235,000 obligation was made as noted below:

Payment Balance

Balance 4/1/56 $ - $235,000

Year ended 3/31/57 12,000 223,000

Year ended 3/31/58 38,000 185,000

Year ended 3/31/59 1,650 183,350

4/1/59-12/31/63 -0- 183,350

1964 147,500 35,850

1965 35,850 -0-

$235,000

Coral Glade Co. accrued interest on the obligation. Gould waived interest after November 1, 1960. He included interest from Coral Glade Co. on his Federal income tax return as follows: 55 *206 Calendar Year Amount

1956 None

1957 $11,788.93

1958 9,391.01

1959 10,645.22

1960 29,830.73

1961 4,261.62

1962 56 1,544.45

Gould elected to treat the sale of Coral Glade Heights as an installment sale.

Sale price $240,000.00

Basis 23,308.71

Long term capital gain $216,691.29

Collection in year of Sale $5,000.00

Reported gain $4,511.44

Activities of Coral Glade Company

Hunter and Gould each conveyed $1,000 to Coral Glade Co. on March 23, 1956. Such amounts were treated as loans.

On December 26, 1956, Coral Glade Co. recorded a plat for Coral Glade Heights creating 160 lots in 10 blocks. The corporation paved interior streets, installed water mains and utilities and graded a portion of the property. The cost of improvements to this subdivision was approximately $500 per lot. These improvements were made with Gould's supervision by Housing Engineers of Florida, Inc. and Southern Rock and Fill Co., two corporations whose stock was owned entirely by the Goulds. (These businesses subcontracted the work out to other corporations.) 57 *207

Beginning in March 1957, Coral Glade Co. entered into contracts with unrelated home building corporations for the sale of its lots in Coral Glade Heights. These sales may be reflected as follows:

Purchaser Date Number of Purchase Down Balance

Lots Price Payment

Tara Homes, Inc. 3/29/57 20 $60,000 $5,000 58 $39,000

Freemar Builders, Inc. 5/2/58 40 59 *208 120,000 10,000 110,000

Centerbrook Construction

Co., Inc. 6/22/59 88 286,000 20,000 266,000

148 $466,000

The deferred payment obligations carried interest at 6 percent and were secured by purchase money mortgages on the lots sold. The mortgages contained subordination and release clauses providing for the subordination of the Coral Glade Co. mortgage to institutional lenders' mortgages, for the purpose of financing the construction of homes on the lots and, the release of designated lots by payment of a specified amount per lot.

Centerbrook Construction Co., Inc., in 1961 or 1962, defaulted on its contract. It financed the construction of homes but never completed the construction. As a result Coral Glade Co. was not paid for the lots, but found itself subordinated to the defaulted first mortgagee. The default reduced Coral Glade Co.'s expected profit and adversely affected its cash flow.

On August 22, 1957, Coral Glade Co. acquired Coral Gardens from Gould. The transaction was characterized as a sale with the delivery of warranty deeds from Sylvania Corp. as nominee and Gould as grantor to Coral Glade Co. for a total consideration *209 of $670,000 paid $5,000 in the form of a note, assumption of a $75,000 mortgage payable to Harold Thurman and the issuance of a promissory note for the remaining $590,000 payable as follows:

Due Date Amount

8/22/58 $ 50,000

8/22/59 50,000

8/22/60 50,000

8/22/61 50,000

8/22/62 390,000

$590,000

Interest was payable at a rate of 5 percent per annum. The note was secured by a purchase money mortgage on the property. The mortgage contained a release clause providing for partial releases upon payment of $9,000 per acre in 10 acre multiples. In addition, the mortgage deed contained the following provision:

The mortgagees will waive all or part of the first principal payment in the event that the mortgagor makes improvements to said property. Such waiver of principal will be made on the basis of $1.00 principal payment waived for each $1.50 of improvements made. Any such waiver will be added to the amount due on the due date of the mortgage.

Payments of principal were made by Coral Glade to Gould as follows:

Calendar Year Amount

1965 89,150

1966 149,500

1967 39,000

1968 103,000

1969 12,500

1970 5,000

1971 24,500

(To date of trial) $422,650

The unpaid principal balance at date of trial was $167,350. Gould waived *210 all the interest except $5,269.79 (this amount was included as income by Gould, supra at 64).

Gould elected to treat the sale of Coral Gardens as an installment sale.

Sale price $670,000.00

Basis 85,104.12

Long term capital gain $584,895.88

Collection in year of sale 60 5,000.00

Long term capital gain taken into account $4,915.09

As of August 1957 the capital and debt structure of Coral Glade Co. may be reflected as follows:

Mortgage payable - Gould $223,000

Mortgage payable - Gould 590,000

Mortgage payable - Thurman 75,000

Note payable - Gould 5,000

61 $893,000

Capital stock $5,000

When Coral Glade Co. attempted to record a plat for the Coral Gardens subdivision, the Dade County Board of Public Instruction refused to approve the plans. Instead, the Board determined *211 that a site for two schools was required in the proposed subdivision. An order was entered for condemnation of 22.51 62 acres in the center of the 110 acre tract. After trial of the issues before a jury in April 1959, it was found and ordered by the Circuit Court of the Eleventh Judicial Circuit of Florida, in and for Dade County, that Coral Glade Co. was entitled to compensation of $139,562 ($6,200 per acre) for the Board's acquisition of the property. McCune appraised the property condemned by the Board at the request and on behalf of Gould. He valued it as 70 of April 15, 1959 at $8,100 per acre. McCune prepared two appraisal reports neither of which was introduced into this record.

The remaining portion of Coral Gardens was not significantly different from the condemned property.

Coral Glade Co. recorded a plat for Coral Gardens on May 14, 1959 wherein 337 lots were outlined in a total of 13 blocks. In *212 addition the subdivision included 1.81 acres of park land and 20.54 acres set aside for a school site.

The Coral Gardens subdivision required more extensive improvements than were necessary for Coral Glade Heights. The cost of these improvements totaled approximately $1,000 per lot which included land elevation, installation of water mains, utilities, and sewer lines and construction of streets. 63 These improvements were again, with Gould's supervision, carried out by Housing Engineers of Florida, Inc. and Southern Rock and Fill Co. (As noted earlier, supra at 65 , these two corporations subcontracted the work to various other corporations)

In 1959 Coral Glade Co., through Taladen Co. (discussed infra at 92), began selling lots in Coral Gardens to unrelated home building corporations. The record discloses the 71 following pertinent facts: Purchaser Date Number Purchase Down Balance

of Lots Price Payment

Monterey Builders, Inc. 8/1/59 36 $138,272.50 $24,668.35 64 *213 $107,172.50

Monterey Builders, Inc. 3/25/60 35 125,317.50 5,362.94 120,317.50

71 $263,590.00

The deferred payment obligations carried interest at 6 percent and were secured by purchase money mortgages on the lots sold. The mortgages contained subordination and release clauses providing for the subordination of the Coral Glade Co. mortgage to institutional lenders' mortgages, for the purpose of financing the construction of homes on the lots and the release of designated lots by payment of a specified amount per lot.

Hunter received neither salary nor dividend distributions from Coral Glade Co.

Coral Way Land Company

Coral Way Land Company (sometimes referred to as Coral Way Co.) was incorporated on September 17, 1959. 65 *214 Stockholders 72 of record were as follows: Name Shares Amount Paid-in 66

Emil Gould 25 $7,500

Estelle Gould 25 7,500

Simultaneously with incorporation Gould transferred an additional $37,500 to Coral Way Co. which was recorded on the books as "loans payable." The note was due 2 years from issuance bearing 4 percent interest. It was paid in full by August 31, 1962 (the close of Coral Way Co.'s fiscal year). Gould advanced additional funds totaling $11,430.28 in 1961 and 1962. These were repaid by October 31, 1962. Gould reported interest in 1961 only, of $3,004.95.

On September 18, 1959 Coral Way Co. lent $50,000 to Coral Glade Co., receiving as partial consideration therefor, 73 an option to purchase certain land from Coral Glade Co. On November 10, 1959, Coral Way *215 Co. exercised the option and obtained a deed to 161 lots in Blocks 1-4 4A and 5-7 of Coral Gardens for a total consideration of $507,150. The $50,000 previously loaned constituted the down payment with the balance of $457,150 represented by a note bearing 6 percent interest secured by a purchase money mortgage. The note was payable as follows:

Due Date Amount

June 1, 1961 $ 75,000

August 15, 1962 382,150

$457,150

Payments were made as noted below:

Date Payment Balance

$457,150.00

3/31/60 $ 15,000.00

3/31/61 -0-

3/31/62 9,000.00

4/1/62-1/15/63 27,531.20 51,531.20

$405,618.80

The minutes of Coral Glade Co. state that the sale price was to be "[On] the wholesale basis * * *". The corporation was to realize approximately a $20,000 profit. 67 *216

As of November 10, 1959, the debit and capital structure of Coral Way Co. was reflected on its books as follows:

Mortgage payable - Coral Glade Co. $457,150

Note payable - Gould 37,500

Total debt $494,650

Capital stock $5,000

Paid in surplus 10,000

Total capital $15,000

Coral Way Co. through Taladen Co. (infra at 92) offered its lots for sale to unrelated home builders. On December 18, 1959, it sold 31 lots to Rafkind Development Corp. for a total consideration of $125,000. Coral Way Co. 75 received a purchase money mortgage, bearing 6 percent interest, containing subordination and release clauses, for the full amount of purchase price. In addition, it received $15,000 for two options to buy an additional 62 lots in Coral Gardens for a total purchase *217 price of $211,600. The options were not exercised. Israel Rafkind suffered a heart attack shortly after the purchase of the first 31 lots. He asked to be relieved of his obligation, set forth in the option contracts, to construct houses on the lots and requested return of the $15,000 option price, rather than forfeit it. Coral Way Co. completely exonerated Rafkind Development Corp. 68

On June 6, 1961, Coral Way Co. entered into a contract for the sale of 88 lots to Heritage, Inc. at a price of $421,080. Under this agreement Coral Way Co. took back a noninterest bearing note for the entire amount of the purchase price by a purchase money mortgage. The mortgage contained release and subordination clauses which permitted Heritage, Inc. to finance, construct and sell homes on the lots. Notwithstanding the favorable terms, Heritage was 76 forced to rescind the agreement and Coral Way Co. reacquired the property. It subsequently sold the land to other purchasers.

On March *218 5, 1962 Coral Way Co. sold 3 lots to Beautyline Investment Corp. for a total consideration of $11,925.

By January of 1963, Coral Way Co. had sold most of the lots initially acquired from Coral Glade Co. It paid $72,735.67 to Coral Glade Co., characterizing such as a payment of accrued interest. As of January 15 its principal remaining assets were mortgage receivables totaling $420,618.80 received from the buyers of the various lots and a small amount of cash. Its liabilities consisted of the unpaid portion of the note due Coral Glade Co. and commissions owing to Taladen Co. These figures may be reflected as follows:

Cash $ 14,505.93

Mortgages Receivable from customers 420,618.80

Total Assets $435,124.73

Commission payable - Taladen (a related corporation) $ 15,000.00

Mortgage payable - Coral Glade 405,618.80

Capital stock $ 5,000

Paid-in surplus 10,000 15,000.00

Earned surplus (494.07)

Total liabilities and capital $435,124.73

On January 15 it transferred its mortgage receivables to Coral Glade Co., characterizing such payment as the satisfaction of the unpaid note and the assumption by Coral Galde Co. of the commissions owed Taladen Co. Simultaneously it liquidated, transferring the remaining *219 cash to the Goulds. Gould reported a loss of $494.07 on the distribution. Coral Way Co. was formally dissolved on February 14, 1963.

Coral Glade Co. - Post 1959

On May 18, 1961, Hunter, individually and as trustee for the benefit of his children, transferred $125,000 to Coral Glade Co. The transaction was treated as a loan with interest payable at 10 percent per annum. Interest was paid and the loan was fully discharged by September of 1963.

Substantially all the lots in Coral Glade Heights and Coral Gardens were sold by 1963. Subsequently, Coral Glade Co. has principally engaged in collection of principal and interest payments on the notes generated by the sale of the various lots.

Darlington Manor Subdivision

Housing Company of Florida was incorporated on May 17, 1954 as a land development and construction company. Emil and Estelle Gould were the sole shareholders having each paid $2,500 for the 10 authorized and issued shares of stock. 78 On May 18, 1955 Gould purchased from Helms Construction Co. the Daughters and Dade County Development subdivisions (name apparently later changed to Tropical Gardens Estates). He conveyed this property on December 14, 1955 to Housing *220 Co. of Florida. Thereupon, Gould entered into a joint venture with nine other individuals to develop, build homes on and sell this property.

Before completion of the Tropical Gardens project Housing Co. of Florida contracted to purchase from Helms Construction Co. the property situated immediately south of and across the street from Tropical Gardens. It totaled 103-1/2 acres in area and was acquired in two separate acquisitions on December 31, 1955 and October 29, 1956. The property which became known as the Darlington Manor subdivision is located 11 miles southwest of Miami and 6 miles southwest of Coral Gables and is between Miller Road on the north, Sunset Drive on the south, S.W. 97th Street on the west and Galloway Road on the east. The land was unimproved with an elevation of approximately 8 feet. The area in general was somewhat less developed than the Coral Glade region. The property was platted in 1959 for 412 single family dwellings. The books of Housing Co. of Florida reflect the following:

Basis in Hands of

Housing Company of Florida

Date

12/31/55 Original purchase 83-1/2 acres $255,000.00

10/29/56 Exercise of option 20 acres 60,000.00

2/28/59 Sewer construction 33,283.52

Total $348,283.52

1/15/59 Sale of 8 acres 69 *221 26,920.48

Balance April 29, 1959 $321,363.04

Housing Co. of Florida purchased the property with the intention of continuing the home building operation initiated at Tropical Gardens. Due to a subsequent change in health regulations septic tanks were prohibited which prevented home building. Because of this inability to construct and sell homes, Housing Co. had a rather difficult time meeting its obligations under the purchase agreement.

From February 28, 1956 through April 29, 1959, Gould transferred $379,500 to Housing Co. (treated as a loan on corporate books - $30,000 was repaid) a portion of which 80 was apparently used to meet the purchase obligation. 70 *222

In 1959 the developers of Miller Heights, a subdivision immediately north of Darling Manor and adjacent to Tropical Gardens, extended sewer lines to its property. At that point it became feasible to develop the Darlington tract.

To carry out this development Darlington Manor, Inc. was incorporated on January 26, 1959. It filed an election to be taxed as a subchapter S corporation for the taxable year 1959. Such election was in effect for 1959 and 1960 only. The shareholders of record were as follows:

Name Shares Amount Paid-in

Rose G. Kaplan 15 $15,000

Emil Gould 5 5,000

Estelle Gould 5 5,000

Rose Kaplan (hereinafter referred to as Kaplan is Burt Hunter's mother. (While Darlington was a small business corporation she reported her share of the corporation's income; subsequently she received a nominal salary of approximately $1,500.)

Kaplan advanced Darlington Manor, Inc. $15,000 on April 14, 1959. The note was payable in 3 years *223 with interest at 5 percent per annum. Interest was paid and principal was fully discharged by April 1962.

On April 29, 1959, Gould transferred all of the outstanding stock of Housing Co. of Florida to Darlington Manor, Inc. The transaction was recorded as a sale with a purchase price of $587,500 payable $15,000 in cash and a promissory note secured by a mortgage paying interest at 6 percent per annum covering the remaining $572,500. Payment on the note was to be made as follows:

Due Date Amount

4/29/60 $ 75,000

4/29/61 75,000

4/29/62 75,000

4/29/63 75,000

4/29/64 272,500

$572,500

No interest was ever paid or accrued on this note. Principal payments were made as follows:

Calendar Year $572,500 Note

1961 5,000

1962 5,000

1963 5,000

1964 20,000

1965 112,500

1966 111,000

1967 98,500

1968 95,500

1969 114,500

1970 5,500

$572,500

Gould reported the transaction as an installment sale.

Sale price $587,500

Stock basis 5,000

Long term capital gain $582,500

1959 collection $15,000

Long term capital gain 1959 $14,872.35 99.149%

Darlington Manor, Inc. immediately after the stock acquisition liquidated Housing Co. of Florida, receiving the following assets and liabilities (book value listed):

Cash $3,014.07

Mortgage receivable 45,000.00

Land 321,363.04

Other assets 2,745.48

Total assets $372,122.59

Note payable - Gould $349,500.00

Other liabilities 18,061.54

Total liabilities $367,561.54

Net book value 71 $4,561.05

*224

Darlington Manor, Inc. took over the assets and liabilities of Housing Co. of Florida at book value, except the land, the basis of which Darlington increased to $904,301.99 on the theory that section 334(b) (2) applied. The basis figure noted immediately above was arrived at as follows: Original basis of land in hands of Housing Co. of Florida $321,363.04

Purchase price of stock by Darlington $587,500.00

Net book value of assets (see above) 4,561.05

Excess over net book value 582,938.95

Revised basis of land on books of Darlington 72 *225 $904,301.99

Housing Co. of Florida was formally dissolved on July 1, 1959.

At the time of liquidation, a journal entry dated April 29, 1959, on the books of Darlington Manor, Inc., split up the item described on Housing Co.'s books as an obligation of $349,500 owed to Gould as follows:

Mortgage payable - Gould $224,500

Mortgage payable - Carrie

Sapiro 125,000

$349,500

The *226 reasoning behind such adjustment is stated below. Prior to April 1959, Gould had borrowed $125,000 from Sapiro. The obligation was secured by the execution of a mortgage on the property held by Housing Co. of Florida. 73 The minutes of Darlington Manor, Inc. indicate that Gould and Darlington agreed that the latter was to assume the obligation due Sapiro and further that the $349,500 obligation due Gould was to be reduced by a commensurate amount.

As of April 29, 1959, the books of Darlington Manor, Inc. reflected a total indebtedness owed to Gould of $797,000 consisting of the following:

Note (acquired stock) $572,500

Liability remaining from Housing Co. of Florida 224,500

$797,000

86

A mortgage on the Darlington Manor subdivision was

A mortgage on the Darlington Manor subdivision was issued to secure the entire obligation. The mortgage was however subordinate to the mortgage given to Sapiro on the assumed indebtedness of $125,000.

The note for $224,500 bore interest at 4 percent and payments were due *227 as follows: Due Date Amount

4/29/60 $25,000

4/29/61 25,000

4/29/62 50,000

4/29/63 50,000

4/29/64 74,500

$224,500

Interest was accrued and paid. Principal payments were made as follows:

Year Principal Payments Balance

4/29/59 $ 224,500.00

1959 -0- 224,500.00

1960 -0- 224,500.00

1961 197,500.00 27,000.00

1962 27,000.00 -0-

Total Payments $244,500.00

The Sapiro note for $125,000 was paid in the following manner:

Year Principal Interest

1959 $14,250.00 $-0-

1960 38,750.00 10,043.19

1961 72,000.00 872.69

Total $125,000.00

87

From April to June 1960 Gould transferred $9,000 to Darlington Manor, Inc. for working capital. This amount was treated as a loan and repayment was made in 1961. Interest was paid timely.

A recapitulation of all principal payments or on behalf of Gould with respect to the obligations previously discussed may be reflected as follows:

Items Described on Various

Corporate Books as Gould Notes Total

Gould Notes Sapiro Notes

Year $572,500 $224,500 $9,000 $806,000 $125,000

1959 -0- -0- -0- 14,250

1960 -0- -0- -0- -0- 38,750

1961 -0- 202,500 9,000 211,500 72,000

1962 10,000 22,000 32,000

1963 5,000 5,000

1964 20,000 20,000

1965 112,500 112,500

Amount

Repaid $147,500 $224,500 9,000 $381,000 125,000

Activities of Darlington Manor, Inc.

Darlington Manor, *228 Inc., immediately after the land acquisition, began an extensive subdividing and land improvement program including grading, installation of streets, sewage and water utilities, etc., which ultimately cost over $400,000. (This work, as with the earlier corporations, was contracted out to Southern Rock and Fill Co. and Housing Engineers of Florida, both owned 100 percent by Gould. These two corporations subcontracted the work out.)

In order to finance the above described improvements, Darlington Manor, Inc. borrowed $200,000 from Sapiro on June 15, 1959, issuing a 3 year promissory note in that amount, bearing 10 percent interest. The obligation was paid in full by March 1962. As noted above, between April and June 1960, Gould advanced $9,000 to Darlington Manor, Inc., which was repaid, with interest, in 1961. Hunter, as trustee of trusts for the benefit of his children, loaned $147,000 to Darlington Manor, Inc. on February 14, 1961, which was repaid by September 1963, with interest at 10 percent per annum.

The debt-to-equity ration reflected on the corporate books as of June 1959 was as follows:

Debt:

Note payable - Rose Kaplan $15,000

Mortgage payable - Gould 797,000

Mortgage payable - Sapiro 125,000

Note payable (improvements) - Sapiro 200,000

Total long term debt $1,137,000

CAPITAL STOCK AND PAID-IN SURPLUS:

Gould $10,000

Kaplan 15,000

Total capital $25,000

Several *229 months after the acquisition of the Darlington Manor subdivision the corporation, through Taladen Co. (infra at 92), began to sell the various lots. On June 30, 1959, Darlington Manor, Inc. entered into an agreement of sale with 89 Arthur Litt and Daniel Cravitt, unrelated persons who agreed to purchase 50 lots in the Darlington subdivision for a price of $210,000. The sale was consummated on September 25 by Malibu Homes, Inc. (hereinafter referred to as Malibu) a corporation controlled by Litt and Gravitt. The purchasing corporation issued a promissory note for the full amount of the purchase price, bearing 5-1/4 percent interest secured by a mortgage. The mortgage contained subordination and release clauses permitting the purchaser to finance the construction of homes on the lots. Gould granted a release on the $797,000 mortgage equivalent to the 50 lots sold without receiving any payment (other than the note from Malibu to Darlington Manor, Inc.).

Simultaneously with the above sale Darlington Manor, Inc. granted to Malibu for $65,000 an option to purchase the remaining 362 lots in the subdivision for a total purchase price of $1,339,500. On March 28, 1960, Malibu exercised *230 the option and issued its promissory note bearing interest at 5-1/4 percent payable in installments through November 1962. The note was secured by a purchase money mortgage on the lots.

Malibu completed construction of 250 homes in the Darlington Manor subdivision. Nevertheless, it was not capable of meeting its obligations under the purchase money mortgages described above. It failed to make timely payments 90 of principal and interest on the notes, and requested that Darlington Manor, Inc., reacquire a portion of the lots that it was not capable of carrying. Ultimately Malibu and Litt went into bankruptcy. The construction lender, to whom Darlington Manor, Inc. was subordinated, foreclosed. Darlington Manor, Inc. was thus forced to arrange for the sale by Malibu of 85 lots to Greenbriar, Inc. and to reacquire the remaining 77 lots and resell them to other builders.

Housing Engineers of Florida, Inc., and Southern Rock and Fill Company

Housing Engineers of Florida, Inc. was incorporated on August 26, 1959, as the successor to the partnership of Emil J. and Estelle Gould, which since the 1940's had undertaken Gould's home building and other activities. Emil J. and Estelle *231 Gould owned all of the stock of Housing Engineers for which they paid $25,000. Gould was the corporation's president.

During the years 1956-1965, Housing Engineers, both as a partnership and as a corporation, was principally engaged as the general contractor for land improvements to the Coral Gardens and Darlington Manor subdivisions, including contracting for the installation of water mains, sewer lines, 91 paving streets and curbs, landscaping, and the like. With the exception of relatively nominal amounts received from related corporations, Housing Engieers' receipts were principally derived from Coral Glade Co. and Darlington Manor, Inc. The contracts totaled over $800,000. The work under these contracts was subcontracted to other, unrelated parties by Housing Engineers. The corporation's assets consisted primarily of cash, receivables from Coral Glade and Darlington, work in process and equipment. The maximum amount of tangible property owned was $31,906.06.

Southern Rock and Fill Co. (hereinafter sometimes referred to as Southern Rock) was incorporated on September 3, 1959. Emil J. and Estelle Gould owned all the stock of the corporation for which they paid $5,000. *232 Southern Rock, like Housing Engineers, was formed for the purpose of undertaking land improvements including grading and fill operations.

Southern Rock and Fill Company rendered services principally to Coral Glade Co. and Darlington Manor, Inc. Its assets consisted primarily of cash receivables from Coral Glade Co. and Darlington Manor, Inc. and work in process. Southern Rock owned no equipment and claimed no depreciation other than a single unidentified asset costing $384.75. It subcontracted out all the work it received.

Both Southern Rock and Housing Engineers were on the cash basis while Coral Glade Co. and Darlington Manor, Inc. were on the accrual method of accounting. The contracts with Coral Glade and Darlington called for payment as work progressed. No dates of completion were set. Taxable income (or loss) as reported is as follows:

Taxable Income

Fiscal Year Ended 74 Southern Rock Housing Engineers

1960 $24,635.09 $ 25,101.53

1961 23,981.35 24,219.64

1962 20,878.39 20,749.38

1963 2,776.76 1,877.94

1964 (12,013.95) (17,358.41)

1965 (21,059.54) 75 *233 (12,993.87)

Taladen Company

The Taladen Co. was incorporated on December 17, 1958. It described its principal business activity as the merchandising and promoting of lot sales (specifically for Coral Glade Co., Coral Way Land Co. and Darlington Manor, Inc.). Its balance sheets indicate a paid-in capital of $2,500, representing a total of 25 authorized and issued shares of stock. The stockholders of record were as follows:

Year Ended September 30th

Name Relationship to

Gould 1959 1960 1961 1962 1963 1964

Emil Gould 6 4 4 2 2 2

Estelle Gould 5 4 4 2 2 2

Katherine Freedman Estelle's mother 3 3 3 3 3 3

Dennis Gould son 4 5 5 5 5 5

Cathie-Ellen Gould (Beber) Daughter 4 5 5 5 5 5

Lauren Gould Daughter 2 3 3 3 3 3

Perley M. Noll Secretary 1 1 1 1 2 2

Robert Freeman Estelle's nephew 1 1 1

Ethel Goldstein Mother 2 2 2

Mina Gains 1

Total Shares Outstanding 25 25 25 25 25 25

Gould performed all the corporate activities.

Taladen made a timely election to be treated as a small business corporation, and filed Forms 1120-A for the years ended September 30, 1959 through September 30, 1964. It reported gross receipts and taxable income (subject to distribution to the shareholders) as follows:

Taxable year ended

September 30 Gross receipts Taxable income

1959 $20,608.63 $ 19,506.16

1960 31,250.00 24,719.98

1961 43,500.00 26,969.93

1962 37,658.98 25,175.89

1963 22,333.03 21,093.15

1964 17,695.00 16,711.18

All *234 gross receipts of Taladen Co. for all years were commissions received from Coral Way Land Co., Darlington Manor, Inc. and Coral Galde Co., on their sales of real estate. Taladen Co. was on the cash receipts and disbursements method of accounting while all the payor corporations were on the accrual method. 94

Darlington Manor, Inc., Coral Glade Co. and Coral Way Co. accrued and deducted commissions payable to Taladen Co. in the amounts and for the years set forth below as follows:

Taxable Year Ending In

Taxpayer 1960 1962 1963 1965 1966

Darlington Manor, Inc. $94,175.00

Coral Glade Co. 12,874.51 5,717.09 3,746.44 3,000 6,660

Coral Way Land Co. 8,250.00 21,587.60 1,500.00

The $94,175 deducted by Darlington Manor, Inc. on its 1960 return was paid to Taladen Co. as follows:

Year Paid by Darlington

1960 $31,500

1961 35,000

1962 17,675

1963 10,000

$94,175

Coral Way Co. owed Taladen Co. $16,955.40 in accrued commissions as of January 15, 1963 (date of its liquidation). One thousand nine hundred and fifty-five dollars and 40 cents ($1,955.40) of this amount was paid in January 1963 and the balance of $15,000 was assumed by Coral Glade Co.

Payment of the Coral Glade Co. commissions was as follows:

Coral Glade FY Amount in Issue Paid on or before June 15

3/31/60 $12,874.51 $ 6,608.63

3/31/62 5,717.09 5,717.09

3/31/63 3,746.44 3,746.44

3/31/65 3,000.00 -0-

3/31/66 6,660.00 2,825.00

$31,998.04 $18,897.16

Gould *235 either performed the selling activities personally or hired independent brokers to promote the lot sales. Taladen paid commissions to unrelated third party brokers. It paid a small amount each year for state corporate franchise tax and an intangible tax as well as costs to circularize local builders to promote lot sales. It also paid and claimed as an expense office rental expense payments made to Housing Engineers of Florida, Inc. (wholly owned by Gould).

Sale of Clin Clara Property

On March 24, 1954, Gould acquired 160 acres of land from Clin Clara Company (hereinafter referred to as the Clin Clara property) at a total cost of $181,655.59. The property is situated approximately 11 miles southwest of downtown Miami. Between 1954 and 1959, Gould took no steps to develop or improve or list it for sale. 96

In 1959 Philip Shore (hereinafter referred to as Shore), an unrelated person, offered to purchase a portion of the Clin Clara property. On July 1, 1959, Gould conveyed 137-1/2 acres of that parcel to Shore for a total purchase price of $628,500, payable to $10,000 in cash, assumption of a $150,000 mortgage note due Sapiro and the balance covered by a promissory note payable *236 within a 4 year period. The note, with interest payable at 5 percent, was secured by a purchase money mortgage which provided release and subordination clauses permitting the purchaser to finance construction and sale of homes. Shore substantially complied with the terms of the agreement.

Gould elected to treat the sale as an installment sale, as follows:

Sales price $628,500.00

Basis:

Land $156,114.81

Expenses 1,083.85 157,198.66

Gain $471,301.34

Gould reported long term capital gain, on the basis of a gross profit ratio of 74.988 percent, with respect to collections of principal on Shore's promissory note. 97

OPINION

Recognizing that even most diligent of tax lawyers probably has not thoroughly and carefully read and studied the morass of facts heretofore enunciated, we will attempt to summarize quickly the pertinent facts prior to launching into our hopefully lucid, and hopefully shorter, opinion.

It is appropriate to acknowledge here the substantial help the Court received from the briefs filed by both parties. We were particularly impressed by the candor of petitioners' brief in discussing the relevant cases.

Beginning in the early 1930's through 1955, Gould was involved in the *237 real estate business (predominantly home building). During the 1940's and early 1950's he acquired unimproved property in various areas of Dade County, Florida near the cities of Miami and Coral Gables. These parcels included, among others, the Sunrise properties (including Sunrise Point, Sans Souci and Sunrise Harbour), Coral Glade Heights and Coral Gardens, Darlington Manor and the Clin Clara property.

In 1955 Gould and Sapiro (the co-owner of the Sunrise properties) partitioned the land, each taking half. Sapiro conveyed his portion of the property (consisting basically of Sunrise Harbour) to three individuals - Hunter, Louis and Rosen - none of whom had any knowledge of the real estate 98 business. Gould formed a corporation with himself, Hunter, Louis and Rosen, as shareholders and "sold" the Sunrise Point, Sans Souci and a section of Sunrise Harbour to the corporation taking back notes. The Sunrise Point lots were thereafter improved and sold to independent third parties. The Sans Souci subdivision was "sold" to Sans Souci Co., which had been incorporated by Gould, Hunter and Rosen at approximately this same period of time. Sans Souci Co. subdivided and improved the *238 land and likewise sold it to third parties.

Several months later Gould and Louis formed Peat Corp. whereupon Hunter, Louis and Rosen "sold" their Sunrise Harbour property to the corporation taking back notes. The Sunrise Harbour property needed extensive improvement as it was, for the most part, either mangrove swamp or completely underwater. To make such improvements Gould "loaned" approximately $800,000 to the corporation. Approximately 1 year later Peat Corp. "sold" this property to nine different corporations which had been formed in or about the same period of time by Gould, Hunter, Louis, Rosen, and several other individuals. These corporations thereupon attempted to sell the lots to third parties.

Coral Glade Co. was incorporated in November of 1955 with Gould and Hunter as its shareholders. In April of 99 1956 and August of 1957, Gould "sold" Coral Glade Heights and Coral Gardens to the corporation. It in turn was to subdivide, improve, develop, and sell the lots. In 1959 Coral Glade Co. "sold" a portion of Coral Gardens to Coral Way Land Co.; a newly formed corporation whose stock was owned entirely by Gould. It in turn sold the lots to third parties.

In 1959 Gould *239 and Kaplan (Hunter's mother) formed Darlington Manor, Inc., whereupon Gould "sold" the stock of Housing Co. of Florida (a corporation whose main asset was the Darlington Manor subdivision and whose predominant liability was approximately $400,000 of notes owed Gould for earlier advances) to Darlington Manor, Inc. Darlington Manor, Inc. immediately liquidated the corporation, acquired the land, subdivided and improved it and attempted to sell such property to third parties.

The sales activities for the Sunrise Sales Co., a partnership (later incorporated) whose interest was owned by Gould, Hunter, Louis and Rosen. The sales activity for Coral Glade Co., Coral Way Co. and Darlington Manor, Inc. was carried on by Taladen Co., a corporation owned by Gould and his family. The improvement activities required by the various subdivisions were contracted to Housing Engineers of Florida, Inc. and 100 Southern Rock and Fill Co., both of whose stock was owned entirely by Gould. These corporations in turn subcontracted the work out.

The following diagram attempts to pictorially illustrate the above:

[Diagram in original omitted here]

Issue 1 - Section 351 vs. Sale

Respondent asserts that *240 the formalistic sales to the various corporations were in substance section 351 exchanges, 76 *241 which, contends respondent, requires a section 362(a) carryover basis to the corporations, and section 301 dividend treatment (to the extent of earnings and profits) to the transferors on receipt of the supposed repayments. Petitioners, on the other hand, argue that the various transactions 103 were valid sales producing a cost basis to the purchasing corporations and capital gains 77 and interest income to the sellers.

The applicability of section 351 is dependent on the existence of three factors. The conveyance of property to a corporation, receiving in return stock or securities, with control of the corporation immediately thereafter in the hands of the transferors. 78 *242

It is apparent that the real estate conveyed to the corporations constitutes property. Therefore, remaining for decision is whether the notes received in exchange for the property were in fact valid debt as petitioners urge or 104 stock or securities as respondent contends, and further, if such are determined to be stock or securities, whether control existed immediately thereafter.

Turning first to the age-old question of stock versus debt the Court of Appeals for the Second Circuit, in Commissioner v. O.P.P. Holding Corp., 76 F. 2d 11 , 12 (C.A. 2, 1935), in attempting to describe the basic difference stated:

[The] vital difference between the shareholder and the creditor [is that the] shareholder is an adventurer in the corporate business; he takes the risk, and profits from success. The creditor, in compensation for not sharing the profits, is to be paid independently of the risk of success, and gets a right to dip into the capital when the payment date arrives.

Such a distinction is a question of fact to be determined from all the evidence presented. Fin Hay Realty v. United States, 398 F. 2d 694 (C.A. 3, 1968); Gooding Amusement Co. 23 T.C. 408 (1954) , Affd. 236 F. 2d 159 *243 (C.A. 6, 1956). No one factor is controlling. John Kelley Co. v. Commissioner, 326 U.S. 521 (1946) .

Initially we note that while the form of the purported debt is important, it is the substance of the transaction which determines the applicable tax consequences. United States v. Henderson, 375 F. 2d 36 (C.A. 5, 1967); 1432 Broadway Corporation, 4 T.C. 1158 (1945) , Affd. 160 F. 2d 885 (C.A. 2, 1947). Though most courts view this as looking 105 to the parties' true intent, the Fifth Circuit (the circuit wherein appeal lies in the instant cases) states it somewhat differently:

[We] think the problem is not one of ascertaining "intent," since the parties have objectively manifested their intent. It is a problem of whether the intent and acts of these parties should be disregarded in characterizing the transaction for federal tax purposes. United States v. Snyder Brothers Company, 79 367 F. 2d 982 -83 (C.A. 5, 1966).

While there have been numerous cases listing a variety of *244 tests to be applied in determining the true nature of a transaction; 80 see Tomlinson v. 1661 Corporation, 377 F. 2d 291 (C.A. 5, 1967) ; Montclair, Inc. v. Commissioner, 318 F. 2d 38 (C.A. 5, 1963); Fin Hay Realty, supra , we feel the concise description enunciated in Emanuel N. (Manny) Kolkey, 27 T.C. 37 (1956) , Affd. 254 F. 2d 51 (C.A. 7, 1958), lists the more pertinent of these requirements. The Court therein stated: Was the capital and credit structure of the new corporation realistic? What was the business purpose, if any, of organizing the new corporation? Were the 106 noteholders the actual promoters and entrepreneurs of the new adventure? Did the noteholders bear the principal risks of loss attendant upon the adventure? Were payments of "principal and interest" on the notes subordinated to dividends and to the claims of creditors? Did the noteholders have substantial control over the business operations; and if so, was such control reserved to them as an integral part of the plan under which the notes were issued? Was the "price" of the properties, for which the notes were issued, disproportionate to the fair market value of such properties? Did the noteholders, when *245 default of the notes occurred, attempt to enforce the obligations? [ 27 T.C. at 59 ]

Looking to the instant cases, it is our opinion that no debtor-creditor relationship ever existed in any of the transfers. The supposed debt instruments were in fact equity interests. It must be emphasized that we carefully scrutinized the factors relating to each individual exchange and while there is some degree of variation between the numerous transactions the similarities running throughout the series of exchanges were so apparent as to necessitate a consistent result.

Before a discussion of each particular transfer some general conclusions relevant to the entire situation will be of assistance. Gould dominated the various transactions before us. He desired to subdivide various parcels of land but he wanted to avoid dealer status. Gould was the only party with any knowledge of the real estate business. He *246 had built and sold both private homes and commercial property, invested in and improved undeveloped real estate, purchased and rented apartment buildings. 107 He managed the activities of each corporation, personally guaranteed loans from various parties to the different corporations, and was the only person, with two exceptions, to receive any form of income from the assorted entities either in the form of salary or repayments on the supposed sales. 81 With the exception of Sunrise Harbour (which will be discussed infra), Gould supplied all the real estate. He was familiar with the tax aspects of the real estate business. Hunter, Louis, Rose and the various other shareholders, on the other hand, knew nothing of the real estate business. (Rosen was an attorney from New York, Hunter and Louis were in the cement business.) Their investments in the various corporations were, with the exception of Peat Corp., nominal from the standpoint of financial contributions and completely void with regard to actual participation in the various transactions. In short, though the stock interest may reflect otherwise, there was nothing arm's length about any of the various transactions. Gould *247 supplied the knowledge, the property and the major portion of the financing required to carry out his intention of systematically subdividing, improving 108 and selling the land through corporation entities. The other shareholders had little or no economic interest in the entire affair. 82

Secondly, with the exception of the property transferred by Peat Corp. to the nine corporations and the conveyance *248 from Coral Glade Co. to Coral Way Co. the sale prices of the various parcels were substantially in excess of fair market value. The price in essence anticipated the profits to be derived from the subdivision, improvement and sale of the various lots.

Each and every corporation was substantially undercapitalized with Gould having knowledge of the fact that additional capital would be needed to make the required improvements prior to sale.

Repayment of the supposed notes was contingent completely on the successful sale of the individual lots.

Payment of principal and interest was never completed on time and legal action was never initiated to require payment. 109 Sunrise Properties, Inc.

The debt to equity ratio of Sunrise, Inc. as of September 23, 1955 was 26 to 1, consisting of $24,000 of equity and $626,000 of debt.

Sunrise, Inc. was organized with $18,000 of paid-in capital. Immediately thereafter Gould transferred Sunrise Point, Sans Souci and a portion of Tract 7 located in Sunrise Harbour to the corporation for a total consideration of $600,000 consisting of $50,000 cash and a note covering the remaining $550,000. The $50,000 down payment could only be made by borrowing *249 an additional $38,000 from Rosen, leaving the corporation with cash on hand of $6,000 ($18,000 + $38,000 - $50,000 = $6,000). See In re Indian Lake Estates, Inc. v. Stewart, 448 F. 2d 574 (C.A. 5, 1971).

Undercapitalization is further indicated by the corporation's inability to commence business operations without further borrowing. That is, before the land could be sold, certain improvements were required. Burr Oaks Corp., 43 T.C. 635 , 646-47 (1965) , affd. 365 F. 2d 24 (C.A. 7, 1966); Lewis L. Culley, 29 T.C. 1076 , 1087-88 (1958) . To acquire the funds necessary the corporation borrowed an additional $38,000 from the Goulds and received a capital contribution of $6,000 from Estelle Gould.

The corporation's only asset was the land. Payment of the note was contingent solely on the sale of this land. 83 Though a portion of the real estate needed only limited improvement prior to sale 84 (Sunrise Point) the Sunrise Harbour tract was either underwater or covered by mangrove requiring extensive improvements indicating the uncertainties of the operation. 85 As we noted in Burr Oaks Corp., supra : If payment to the transferor is dependent solely upon the success of an untried, undercapitalized *250 business, the prospects of which are uncertain, the transfer of property raises a strong inference that it is, in fact, an equity contribution. [ 43 T.C. at 647 ]

Gould dominated the corporation. Not only was he the president, but he also was the general manager in charge of daily business operations. Gould was the only person knowledgeable in the real estate area. He was very well known the *251 Sunrise properties were commonly referred to as the Gould subdivision. The other shareholders were simply passive investors with very little economic interest in the corporation. 86

The sales price greatly exceeded the properties' fair market value at the time of conveyance. On May 25, 1955 Gould and Sapiro partitioned the Sunrise properties, each taking what in his opinion was land representing one-half the value of the entire subdivision. Both parties were extremely knowledgeable and experienced in the real estate business; Gould had been building homes and acquiring land since the early 1930's while Sapiro, also involved in land acquisition and home building, had been an active and inactive real estate broker for approximately 25 years at the time of the partition. Three months later Sapiro sold his entire portion of the Sunrise properties to Hunter, Louis and Rosen for a total consideration of $315,360. On the same day, Gould sold his portion of the subdivision, less two tracts located in Sunrise Harbour, to Sunrise, Inc. for a total sales *252 price of $600,000. It is our opinion that the discrepancy is due substantially to Gould's overvaluation of the real estate. "The inflation of the "sales price" to petitioner served to extend the period during which * * * [the transferors] could participate in petitioner's business as "creditors' and increased the amount which they could withdraw as "principal" if the venture proved successful." Burr Oaks Corp., supra, at 649 . See Emanuel N. (Manny) Kolkey, supra ; Bruce v. Knox, 180 F. Supp. 907 (D. Minn., 1960).

In further support of this judgment we point to the two appraisal reports prepared by Coopman and Slack in which they assign values of $294,000 and $344,350 respectively to the land in question. We find both their testimony and reports to be reasonably candid and accurate. Substantial work was obviously done in preparing the reports. They included a history and description of the surrounding area, precise characteristics of the specific real estate in question, and most important a substantial number of comparative sales.

Petitioners urge however that the reports are inaccurate. They specifically point to improper zoning and erroneous land elevations specified in the *253 appraisals. They also submit an appraisal prepared by McCune at the time of sale valuing the properties at $600,000.

There was in fact a Zoning error. However it was not in reference to property conveyed by Gould to Sunrise, Inc. and therefore is of no consequence. 87 *254 With regard to the elevation of the land we note that petitioners did not demonstrate error in respondent's appraisals, but rather, merely showed that the topography maps used to ascertain the heights had been prepared approximately 15 years prior to the sale and therefore the elevation in the interim could have changed. Furthermore, even if such were the case McCune, petitioners' appraiser, used the same maps.

As to McCune's appraisal we note that while it values the various parcels and includes the legal and physical description of the real estate it includes no comparative sales upon which the valuation is based. During cross examination McCune could not remember any of the sales considered nor any of the parties from whom he acquired the information. 88 *255 It is therefore our conclusion that the price imposed by Sapiro and the appraisals prepared by Coopman and Slack must take precedent in arriving at our valuation. Finally, in light of our conclusion that the various transactions were not at arm's length, the parties' supposed reliance on the appraisal in determining the sale price loses validity.

Petioners, in support of their position, argue that the substantial payment of the note, disproportionate holdings of stock and debt and the success of the sales substantiate the validity of the debt.

We agree that timely payment of a supposed debt instrument certainly is an indicia supporting debt treatment. There are however several factors which tend to neutralize this treatment. One hundred and fifty-four thousand, five hundred and ninety-five dollars ($154,595) of the $550,000 note was paid after August 31, 1960, the due date of the final payment. In august of 1959 Gould extended the maturity date an additional 3 years and simultaneously waived interest. Four thousand, eight hundred and eighty-five dollars ($4,885) still remains unpaid.

The theory of disproportionate interests is based on a presumption that a party who is a creditor will, *256 to the detriment of the shareholders, enforce his interest if the debtor fails to make payment. Such theory has, in the Court's opinion, little applicability to the present set of facts. Gould was the only party with a true economic interest in the transaction, i.e. there was nothing disproportionate. He desired to subdivide property and at the same time obtain capital gain rates on the appreciated value. Foreclosure in the event of nonpayment would simply have returned Gould to his earlier position. What he was most interested in was the promotion of the sale of the land, i.e. an equity interest.

With regard to the success of the venture we note that only 32 of 46 lots in Sunrise Point were sold between 1955 and at least 1960. In our opinion this does not represent unbridled success. However, assuming the transaction was successful, petitioners have failed to demonstrate that such was reasonably certain at the time of the initial transfer. 89 Piedmont Corporation v. Commissioner, 388 F. 2d 886 (C.A. 4, 1968), revg. a Memorandum Opinion of this Court; Aqualane Shores, Inc. v. Commissioner, 269 F. 2d 116 (C.A. 5, 1959), affg. 30 T.C. 519 (1958) . Rather, as is noted in the facts *257 a major portion of the buyers of the various parcels defaulted for one reason or another.

Sans Souci Company

The equity factors are equally or even more apparent in the transfer to Sans Souci Co. On November 17, 1955, 2-1/2 months after the initial transfer from Gould to Sunrise, Inc., Sunrise, Inc. transferred the Sans Souci subdivision to Sans Souci Co. The sale price was very nearly the same as had been assigned to this land on the initial transfer from Gould, 90 *258 thereby substantially eliminating the gain recognizable by Sunrise, Inc. 91 There was no business purpose for the transfer other than the reduction of income taxes through the use of a multi-surtax exemption. 92

The corporation was so thinly capitalized as to be transparent (a ratio of 392 to 1). It was incorporated with a paid-in capital of $900. Immediately thereafter it purchased the Sans Souci subdivision for a total consideration of $340,000, consisting of $7,275 in cash and a note covering the remaining $332,725. Simultaneously, in order to meet the required down payment and improve the land prior to sale, Gould and Rosen each transferred an additional $10,000 to the corporation.

Though the required payments were made they were not completed until 4 years after the due date.

As in Sunrise, Inc., the payment of the purchase price was contingent solely on the successful sale of the property. *259 And the expectation of success was even more uncertain since the Sans Souci subdivision required more significant improvements than were necessary in Sunrise Point. Further, Sunrise, Inc. could cast little light on the probability of success since Sunrise, Inc. did not register a sale until sometime in 1956, several months after the conveyance to Sans Souci Co.

Peat Corporation

During the summer of 1955 Gould informed Hunter of the impending partition with Sapiro. Several months later Hunter, Louis and Rosen purchased Sapiro's portion of the Sunrise properties, including the major portion of Sunrise Harbour and a small portion of Sunrise Point. The property, to a great extent, was either underwater or covered with mangrove and therefore needed massive improvement before it could be sold. None of the three purchasers had any knowledge of the real estate field. These facts, coupled with the prior ventures, lead to a logical conclusion that neither Hunter, Louis nor Rosen would ever have purchased the property without a prior "gentlemen's agreement" from Gould that he would improve and sell the land. Such is exactly what occurred.

Peat Corp. was incorporated on April 4, 1956 *260 with a paid-in capital of $4,500. Immediately thereafter it purchased Sunrise Harbour and the small portion of Sunrise Point (for purposes of brevity we will refer to both as Sunrise Harbour unless otherwise indicated) for a total 119 consideration of $713,500 consisting of $18,500 in cash, the assumption of a mortgage totaling $240,000 due Sapiro, and the execution of a note covering the remaining $455,000. 93 Thus immediately after incorporation its debt to equity ratio was $695,000 to $4,500 or 154 to 1. 94 *261

The shareholders were well aware that the corporation would need substantial additional funds to improve the land before it could be sold, and in fact Peat Corp. received $12,500 from Dr. Nathan Schacher and $783,500 from Gould.

Finally, although this Circuit has rejected the notion that thin capitalization will alone justify the commissioner in designating indebtedness as capital, Rowan v. United States, 219 F. 2d 51 (5th Cir. 1955) , it is very strong evidence in a case such as this where (1) the debt to equity ratio was high to start with, (2) the parties understood that it would likely go higher, and (3) substantial portions of these funds were used for the purchase of capital assets and for meeting expenses needed to commence operations. United States v. Hunderson, 375 F. 2d 36 , 40 (C.A. 5, 1967).

The above quoted language is clearly applicable to the instant transaction.

Like its two predecessors, Peat Corp.'s only asset was the land. Payment of the note was contingent solely on the sale, and as noted above, before sales could be *262 made extensive development was required, further indicating the creation of equity rather than debt. Aqualane Shores, Inc., supra ; Burr Oaks Corp., supra.

Looking next to the history of payment we note that while the entire $240,000 obligation owed Sapiro was timely paid, only $32,200 of the $455,000 owed Hunter, Louis and Rosen was ever paid. In addition, interest was waived after October 1958.

As in Sunrise, Inc. the sales price greatly exceeded the property's fair market value at the time of conveyance. Recalling our earlier discussion we noted that Hunter, Louis and Rosen acquired Sunrise Harbour from Sapiro for a total consideration of $315,360. Seven months later they sold most 121 (not all-retaining the westerly portion of Tract 7, Tract 4 and Tract 6 (east)) of this property to Peat Corp. for $713,500. This enormous increase is due to the parties' over-valuation of the property, i.e. the anticipation of profits to be derived from extensive development. Piedmont Corp., supra, at 890 ; Burr Oaks Corp., supra. Such was, as we have noted earlier, consistent with the parties' desires to obtain substantial capital gain treatment while at the same time subdividing and selling *263 the property at nominal ordinary gain.

Our decision with regard to over-valuation is once again substantiated by the appraisals of Coopman and Slack which valued the property at $294,000 and $344,350, respectively (petitioners submitted no appraisal). While there could conceivably be an error in the valuation, such could not exceed $400,000.

Lastly, we note that while Hunter and Rosen were not shareholders of Peat Corp. they, along with Louis, were shareholders of the nine corporations which acquired the Sunrise Harbour property. 95 It is therefore apparent that any possible problem created by this formalistic void of 122 creditor-shareholder continuity 96 is removed when we look to the entire substance of the transaction.

Transfer to Eight Corporations

We are in this instance concerned with the transfer by Peat Corp. of the Sunrise Harbour property to eight of the nine corporations. 97 Initially we held that the conveyance of property to the various organizations was done, at least primarily, for the purpose of reducing taxes. However this factor alone should *264 not convert debt to equity if in fact debt exists. It is our determination however that in substance no such debt was ever created.

Looking first to capitalization we note that the eight corporations were formed with a total of $15,360 of paid-in capital. Immediately thereafter these eight corporations purchased the Sunrise Harbour property for a total price of 123 $1,104,750, paying $9,250 at the time of sale and thereby leaving an unpaid balance of $1,095,500. 98 *265 These figures reflect a debt to equity ratio of approximately 71 to 1.

We recognize that the extreme debt equity ratio is of less significance in this instance because the eight corporations were not required to make additional capital expenditures, but rather, were simply going to sell the purchased lots. Therefore Peat Corp. could at first blush reasonably expect payment in a relatively short period of time. Piedmont Corp., supra, at 890 . However, that in reality was not the true situation.

The eight corporations were given equitable title to property which could not be sold until Peat Corp. made substantial improvements. Therefore, it is manifest that Peat Corp. could expect no payment until it improved the land. As it turned out, such improvements were not completed until December 1962, 5-1/2 years after the sale.

As we noted earlier, a factor considered in determining the existence of debt or equity is the transferor's expectation of payment, i.e. payment regardless of *266 the transferee's success. Gilbert v. Commissioner, 248 F. 2d 399 (C.A. 2, 1957). It is quite apparent that Peat Corp. could not be paid until the land was sold and the land could not be sold until Peat Corp. completed the extensive improvements. See Aqualane Shores, Inc., supra ; Burr Oaks Corp., supra.

The note issued by the eight corporations were due and payable 4 years after issuance. As of December 31, 1961, 4-1/2 years after issuance, Peat Corp. had received $228,800 of the unpaid $1,130,500. 99 As of December 31, 1965, Peat Corp. had received an additional $151,084 bringing the total to $379,884.

During 1960 and 1961, Peat Corp. extended the due dates 3 years and waived all interest. Demand for payment was never made and suit was not brought to force payment.

Lastly we note that as of December 31, 1965, the eight corporations had sold 83 of 121 lots and, as noted above, *267 Peat Corp. had received $379,884. We seriously doubt that 125 the shareholders and directors of Peat Corp. expected to receive an additional $750,000 from the sale of the remaining 38 lots. In short, the conglomeration of these factors removes any possible belief that Peat Corp. could have reasonably expected payment within the time initially specified, i.e. there was clearly no debtor-creditor relationship created.

Coral Glade Company

For purposes of clarity we note initially that whether the two transfers of property are considered together or separately they are both in our opinion exchanges by Gould in return for an equity interest. See infra, footnote 100. In the interest of brevity the transfers are discussed together.

Coral Glade Co. was incorporated on November 16, 1955, with a paid-in capital of $5,000. Shortly thereafter it purchased from Gould (through Sylvania Corp., a nominee of Gould), the Coral Glade Heights subdivision at a total cost of $240,000 - $5,000 in cash and a note reflecting the balance - thereby creating a debt equity ratio of 47 to 1.

Approximately 17 months later in August 1957, Coral Glade Co. purchased from Gould the Coral Gardens subdivision. *268 The sale price was $670,000 including $5,000 in cash, the 126 assumption of a $75,000 mortgage and the issuance of a note for the remaining $590,000. 100 *269

A further indication of the corporation's under capitalization is the land improvements required before the two subdivisions could be sold. The estimated cost of such improvements totaled $412,000 ($80,000 for Coral Glade Heights and $337,000 for Coral Gardens). To help finance these expenditures Coral Glade Co. borrowed $6,000 from Gould and $126,000 from Hunter. The Court of Appeals for the Fifth Circuit in Aqualane Shores, Inc. v. Commissioner, supra at 120 noted: 127

In the Sun Properties case the income from the property transferred was such as to require the conclusion that the obligation could be paid from it leaving the capital assets unimpaired. Here the property was not income producing and required expenditure of development costs to make it subject to profitable sale. The contract obligations clearly represented risk capital.

This language is quite obviously applicable to the present situation.

The notes issued with regard to the Coral Glade Heights property were due and payable in 1961. However as of the *270 date of the trial only $51,650 had been paid. The remaining balance was conveyed to Gould in 1964 and 1965. Interest was waived after 1960.

Coral Gardens was no different. The notes were due during 1962 but no payment was made until 1965. As of the date of trial $167,350 remained unpaid. No interest except approximately $5,000 was ever paid.

Adding to the already obvious conclusion that the notes are in fact equity, it is our conclusion that the "selling price" exceeded the properties' fair market value. This decision is based on the appraisal reports prepared by Coopman and Slack, which valued the two parcels as follows:

Coopman Slack Selling Price

Coral Glade Heights $100,000 $110,000 $240,000

Coral Gardens 302,500 330,000 670,000

128 While we readily admit that petitioners' counsel did an excellent job of "punching holes" in these appraisal reports, we find such holes to be of relatively little consequence when compared to the obviously thorough appraisal prepared by the above two named individuals.

Petitioners, however, did introduce a condemnation award issued by the Circuit Court of the Eleventh Judicial Circuit of Dade County, Florida, for a portion of the Coral Gardens subdivision *271 which they assert demonstrates the erroneous valuations reported by Coopman and Slack.

Initially we point out that condemnation awards are normally not used in determining a property's fair market value. Cf. American Society of Appraisers, Appraisal and Valuation Manual, vol. 7, 1962-63. Further, the condemnation award was in regard to approximately 22 acres within Coral Gardens; it did not value a 150 acre tract. Finally, and most importantly, the condemnation award was issued during the month of April, 1959 almost 2 and 3 years after the transfers in issue. With these factors in mind, we find the disparity 129 to be far less significant than petitioners would have us believe. 102 *272 However, to the extent there may remain a question as to the properties' value at transfer we note that over-valuation is not a requirement in determining the existence of equity. Aqualane Shores, Inc., supra.

Coral Way Land Company

Coral Way Land Co. is no different than any of the other corporations heretofore mentioned except that the tax avoidance motives causing its formation are perhaps more apparent. 103 The corporation was thinly capitalized. Immediately after formation it borrowed additional funds. Insignificant payments were *273 made on the notes. Substantial land improvements were required. Payment of the sale price was contingent solely on the sale of the various lots and such sales were far from certain.

Coral Way Co. was incorporated on September 17, 1959, with Emil and Estelle Gould as its only two shareholders. The paid-in capital totaled $15,000. Immediately thereafter Gould loaned Coral Way Co. $37,500. Coral Way Co. in turn loaned $50,000 to Coral Glade Co. taking back an option on a large section of the Coral Gardens subdivision. It exercised the option and "purchased" the property for a total consideration of $507,150 with the $50,000 loan acting as the down payment. The debt equity ratio was therefore $494,650 to $15,000, or 33 to 1.

Noted in one of the land contracts entered into between Coral Way Co. and a buyer, Rafkind Development Corp., was the following:

As part of this transaction, the Seller obligates itself at the time of closing, and such obligation shall survive the closing, to do the following things:

1. To cause the land covered by this contract to be brought *274 to the grade of the crown of the finished road facing it. 131

2. To pave the streets as indicated on the plat surrounding, facing, or abutting the property being sold hereunder.

3. To bring and install drainage structures, including the digging of swales, sanitary sewers, and water mains, water lines, and water meters to each of the lots being sold hereunder.

4. To provide access from Coral Way to the property upon which building is to be undertaken for purposes of transmittal of materials, and further, to provide ready access for prospective purchasers.

The above clearly indicates the substantial amount of improvements required. Such provisions were included in sales contracts executed up to and through March of 1962.

The notes required payment by August of 1962, yet by January 15, 1963, $51,531.20 of the $457,150 unpaid purchase price had been paid.

Payment of the purchase price was obviously contingent on the sale of the lots and such sales were far from certain. 104

Darlington Manor, Inc.

Darlington *275 Manor, Inc. was incorporated on January 26, 1959, with a total capital contribution of $25,000. Several 132 months later Gould sold his stock of Housing Co. of Florida to Darlington Manor, Inc. (Housing Co. of Florida's only substantial asset was the Darlington Manor subdivision) for a total consideration of $587,500 with a cash down payment of $15,000 and notes covering the remaining $572,500. Darlington Manor, Inc. immediately liquidated Housing Co. of Florida, acquired its sole asset and its liability which included notes payable to Gould of $349,500 and $18,061 of other liabilities. (The $349,500 notes payable was reallocated $224,500 to Gould, $125,000 to Sapiro who had earlier loaned Gould a comparable amount of money.) The debt equity ratio immediately after liquidation was $922,000 to $25,000, or 37 to 1.

The parties were well aware of the fact that the real estate needed substantial improvement before sales could commence. These improvements ultimately cost over $400,000. To finance this necessary work, Darlington Manor, Inc. was again forced to borrow money. Within the next 2 or 3 years after incorporation, Darlington Manor, Inc. borrowed $371,000 consisting of the *276 following:

$ 15,000 Kaplan

9,000 Gould

200,000 Sapiro

147,000 Hunter

$371,000

133 Once again quoting from United States v. Henderson, 375 F. 2d at 40 :

Finally, although this Circuit has rejected the notion that thin capitalization will alone justify the commissioner in designating indebtedness as capital, Rowan v. United States, 219 F. 2d 51 (5th Cir. 1955) , it is very strong evidence in a case such as this where (1) the debt to equity ratio was high to start with, (2) the parties understood that it would likely go higher, and (3) substantial portions of these funds were used for the purchase of capital assets and for meeting expenses needed to commence operations.

The facts enunciated above manifest applicability of the quoted language.

The notes evidencing the purchase of the real estate were due and payable by April of 1964. As of that date however only $35,000 had been paid. The remaining $537,500 was paid between 1965 and 1970. No evidence was presented regarding interest and therefore we assume none was paid.

Payment of the purchase price was contingent completely on the sale of the subdivided real estate and such sales, as can be seen from the record of payment, were far *277 from certain.

Further evidence of the equity character of the notes can be ascertained from the inflated sales price assigned to the Housing Co. of Florida stock. 105 Such price clearly anticipated the appreciated value of the real estate to be brought about by the required improvements. Burr Oaks Corp., supra ; Bruce v. Knox, 180 F. Supp. 907 (D. Minn., 1960).

Summary

The numerous facts enunciated above demonstrate the lack of bona fide debt. Rather, what was established was the intent to obtain undue capital gain treatment through the conveyance of property to various closely held corporations at excessively high prices and continued participation therein in the hopes of obtaining the desired benefit. We therefore conclude that the purported debt is in fact a stock interest. 106 *278

Having determined that the supposed debt was in fact an equity interest it becomes unnecessary to determine whether the notes were securities.

The last requisite to the application of section 351 is the existence of the required "control" of the corporation in the hands of the transferors "immediately after" the 135 transfer. Section 368(c) defines "control" for purposes of section 351 as meaning "ownership of stock, possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other classes of stock of the corporation."

With the exception of the transfer by Gould of Coral Gardens to Coral Glade Co. there can be little question regarding the existence of control. Each shareholder upon the formation of the various corporations transferred cash and in return received stock. "It is settled law that *279 money constitutes property for purposes of section 351 ." Burr Oaks Corp., 43 T.C. at 650 ; American Bantam Car Co., 11 T.C. 397 (1948) , affd. per curiam 177 F. 2d 513 (C.A. 3, 1949). Simultaneously with or shortly thereafter the various transferors exchanged their property for notes which we have previously characterized as equity. This Court in Burr Oaks Corp., 43 T.C. at 651 , speaking to this precise point noted:

Although Elkind, Watkins, and Ritz may not have received their preferred stock interests in petitioner at exactly the same time as the common stock was issued to Ritz" brothers and the respective wives of Elkind and Watkins, it seems clear that the transfers of cash and the Burr Oaks property to petitioner were integral parts of a unified transaction. * * * On the basis of the record before us, it appears to us that Elkind, Watkins, and Ritz, together with Ritz" brothers, Elkind's wife, and Watkins' wife, were in control of petitioner, as defined in section 368(c) , immediately after their transfer of property to it. The situation in the instant case is identical to that presented in Burr Oaks Corp. and we therefore conclude that the requisite control is present.

While *280 the Coral Gardens transfer presents a more difficult problem, due to the lapse of time between the corporate formation and the exchange, there can be little doubt that this transfer was also integrally related to the earlier exchange. Gould initially acquired the land as one parcel of property (it was not divided into two subdivisions until the separate conveyances to the corporations). He intended to subdivide, improve and sell the entire area. However, while it was always his intent to transfer the entire property to Coral Glade, he was prevented from carrying out this intent in one step by reason of the fact that acceptable sewage facilities were not immediately available on 110 of the 150 acres.

Accordingly he transferred immediately the 40 acres on which proper sewage facilities existed and then, after appropriate facilities became available on the remaining 110 acres, he completed his original plan by transferring this acreage to the corporation. Both parcels were improved and a joint sales program commenced. That Gould dominated the corporation seems clear. The section 351 "control" requirement is met.

While we recognize that 17 months is a substantial delay we hasten *281 to point out that multi-transfers need not occur simultaneously. Burr Oaks Corp., supra. Further, the Court of Appeals for the Sixth Circuit affirming per curiam a District Court decision in Stanley, Inc. v. Schuster, 421 F. 2d 1360 (C.A. 6, 1970), affg. 295 F. Supp. 812 (S.D.Ohio, 1969), determined the transfer of land for notes (which it re-characterized as equity) to be interrelated with the purchase of stock even though such transfer occurred 4 years after the initial purchase.

We therefore conclude that the necessary control existed with regard to the Coral Gardens transfer as well.

Having determined that the nonrecognition provisions of section 351 apply to the transfer of the various properties, 107 the corporate basis in the property is limited to a carryover basis from the transferors plus gain recognized. Section 362(a) (1) . 108 *282

138

To the extent subsequent distributions were made to the transferors, such are determined to be taxable as dividends to the extent of corporate earnings and profits. 109 *283

138 a

Issue 2. Dealer vs. investor

Having determined that the transfers to the various corporations were nontaxable section 351 exchanges, we need only decide the character of the gain recognized on the sale of the Clin Clara property. 110 *284 Such will depend on our determination as to whether Gould held the real estate primarily for sale to customers in the ordinary course of business or as an investment. This, of course, is a question of fact. W. T. Thrift, Sr., 15 T.C. 366 (1950) .

Faced with this question on innumerable occasions, the courts have adopted several well-recognized tests. These tests include: (1) The purpose for which the asset was acquired; (2) the frequency, continuity, and size of the sales; (3) the activities of the seller in the improvement and disposition of the property; (4) the extent of improvements made to the property; (5) the proximity of sale to purchase; and (6) the purpose for which the property was held during the taxable years. William B. Howell, 57 T.C. 546 , 554 (1972) . 139

Applying these tests to the facts of the instant cases it seems clear that the Clin Clara property was held for investment. The land, consisting of 160 acres, was acquired in March 1954 for a total consideration of $181,655.59. In July of 1959, over 5 years later, Gould sold 137-1/2 acres of this property to Shore, an unrelated third party. The sale price totaled $628,500. During the period between acquisition and disposition the land was neither subdivided nor improved. Gould did not advertise the property for sale but rather was approached with regard to its sale. The gain recognized *285 was due solely to appreciation.

Respondent raises two contentions however which deserve reply. First, he points to Gould's activity in the various areas of the real estate field and argues that this demonstrates his dealership characteristics. He further contends that a piece of property may be held primarily for sale to customers in the ordinary course of business though such is not indicated from the above enunciated tests, as for example the conveyance of unimproved land to a closely held corporation which in turn subdivides, improves and sells the property.

Turning to respondent's first contention we note that the case law is replete with decisions which hold that a person may be both a dealer and an investor. William B. Howell, 57 T.C. at 557 ; Real Estate Corp., 35 T.C. 610 (1961) , 140 affd. 301 F. 2d 423 (C.A. 10, 1962); Charles E. Mieg, 32 T.C. 1314 (1959) . Therefore it is not the individual's characteristics which are determinative but rather the characteristics of each individual parcel of property. The above noted factors indicate that the Clin Clara property was held for investment.

With regard to the second assertion, this Court recognizes that there have been *286 decisions holding an individual to be a dealer as to a particular parcel of property though he did little to improve, subdivide, or sell the land but rather conveyed such property to a closely held corporation to carry out such desires. See Burgher v. Campbell, 244 F. 2d 863 (C.A. 5, 1957); Royce W. Brown, 54 T.C. 1475 (1970) , Affd. 448 F. 2d 514 (C.A. 10, 1971). These, and other cases cited by respondent, are factually distinguishable from the present transaction especially in light of the ultimate purchaser of the Clin Clara property.

Issue 3. Taladen Company

The Court must next consider whether the income of Taladen Co. is taxable to Gould. 110a In arriving at such a decision we are required to determine whether Taladen Co. was a sham or, in the alternative if the corporation was a viable entity, whether Gould was the true earner of the income.

141

In American Savings Bank, 56 T.C. 828 , 838 (1971) , this Court noted:

It is clear that a corporation, even though duly organized *287 under the laws of a State, is subject to attack and the concomitant consequences if it is found to be no more than a vehicle for tax avoidance and void of any other legitimate business purposes. Gregory v. Helvering, 293 U.S. 465 (1935) ; Aldon Homes, Inc., 33 T.C. 582 (1959) . It is equally true, on the other hand, that a corporation formed for a legitimate business purpose and conducting business activity must be recognized as a separate taxable entity. Moline Properties v. Commissioner, 319 U.S. 436 (1943) ; Ernest H. Weigman, 47 T.C. 596 (1967) affirmed per curiam 400 F. 2d 584 (C.A. 9, 1968); Sam Siegel, 45 T.C. 566 (1966) .

It is apparent from the evidence presented that the corporation was organized for no other reason than the obtaining of tax benefits. It carried on no business activities and therefore did not earn the income in question. Though a legal entity in form, the clear substance necessitates a conclusion that Taladen Co. was a sham and must be disregarded.

To substantiate this decision we note as background that Taladen Co. was created and controlled by Gould with stock ownership in himself and his family. He alone could perform the supposed activities of the *288 corporation. Taladen Co.'s only occupation was as sales agent for three corporations in which Gould had a substantial interest, Coral Glade Co., Coral Way Co. and Darlington Manor, Inc. Gould, beside being in effective control of these corporations, was responsible for carrying out their everyday activities, 142 which we conclude would logically include selling activities. Thus, the corporate responsibility of Taladen Co. was, in substance, simply to reproduce the activities required of Gould in his role as manager of the three other corporations. The various selling activities were performed by Gould and several outside unrelated brokers. The commissions were not paid timely. In short, the formation of Taladen Co. was required for no other reason than the spreading of income and the creation of another surtax exemption. 111 *289

Further, had we determined Taladen to be a viable entity it is manifest that Gould and not the corporation earned the income and therefore, under the ever-present theory of "assignment of income," 112 he would be subject to the tax thereon. Lucas v. Earl, 281 U.S. 111 (1930) ; United States v. Basye, U.S. (1973) 73-1 U.S.T.C. par. 9250; Jack E. Morrison, 54 T.C. 758 (1970) ; Jerome J. Roubik, 53 T.C. 365 (1969) .

143

Having determined that Taladen Co. is a sham it is our further opinion that the income payable to such corporation is additional compensation rather than dividend income to Gould. We base our conclusion on the simple fact that Gould carried out a necessary function for which he reasonably could be compensated.

Our characterization of the income payable to Taladen Co. as compensation to Gould would logically imply an equivalent deduction to the various corporations. However, respondent contends otherwise. A substantial portion of the income was not paid to Taladen *290 in the year earned or within 2-1/2 months of the following year. Coral Glade Co., Coral Way Co. and Darlington Manor, Inc. were on the accrual method while both Gould and Taladen were cash basis. Respondent therefore contends that section 267(a) (2) denies such deduction to the extent not timely paid.

Section 267(a) (2) provides:

SEC. 267 . (a) Deductions Disallowed. - No deduction shall be allowed -

* * *

(2) Unpaid Expenses and Interest. - In respect of expenses, otherwise deductible under section 162 or 212, * * *

(A) If within the period consisting of of the taxable year of the taxpayer and 2-1/2 months after the close thereof (i) such expenses or interest are not paid, and (ii) the amount thereof is not includible in the gross income of the person to whom the payment is to be made; and 144

(B) If, by reason of the method of accounting of the person to whom the payment is to be made, the amount thereof is not, unless paid, includible in the gross income of such person for the taxable year in which or with which the taxable year of the taxpayer ends; and

(C) If, at the close of the taxable year of the taxpayer or at any time within 2-1/2 months thereafter, both the taxpayer and *291 the person to whom the payment is to be made are persons specified within any one of the paragraphs of subsection (b).

The facts clearly indicate the applicability of subsections 267(a) (2) (A) and (B). The remaining question concerns the necessary relationship required in subsection 267(a) (2) (C) which in turn refers to 267(b). In the instant case, since we are dealing with a corporation and its shareholder, subsection 267(b) (2) would be the appropriate provision. It states:

(b) Relationships. - The persons referred to in subsection (a) are

* * *

(2) An individual and a corporation more than 50 percent in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual.

Gould owned all of the stock of Coral Way Co. 113 and therefore there can be no doubt as to the relevance of the above quoted provision.

145

Coral Glade Co. and Darlington Manor, Inc. are more difficult. The stock ownership of these corporations, as reflected in the facts, indicates *292 Gould holding 50 percent of Coral Glade Co. and 40 percent of Darlington Manor, Inc. Manifestly such is not "more than" 50 percent. However, we initially characterized the notes received by Gould from the corporations on the sale of the various parcels of property as stock. Therefore, it is apparent that Gould did in fact own more than 50 percent in value of the capital of the corporations and thus the requirements of subsection 267(b) (2) are satisfied. 114

We find support for this position in a recent Fifth Circuit decision, In re Indian Lake Estates, Inc. v. Stewart, 448 F. 2d 574 *293 (C.A. 5, 1971), wherein the Court characterized purported loans as an equity interest and thereupon determined that the sales of property to the corporation at a discount were between related taxpayers and disallowed the deduction. The Court stated: 146

We conclude * * * that the financial input of the Lake Wales Group, Mr. and Mrs. Edelen and the Barmit Group was equity capital and not loans.

The determination that the Lake Wales Group were equity investors who owned more than 50 percent of the capital of the corporation means that the Commissioner correctly determined that the discount sales by Indian Lake Estates of its land purchase installment contracts to the same individuals were sales between a corporation and a controlling stockholder. Therefore, the expense of these discounts was not allowable under Section 267 of the Internal Revenue Code of 1954 , 26 U.S.C.A. § 267 . [ 448 F. 2d at 580 ]

The requisites of section 267 are met and therefore the three corporations are denied a deduction to the extent payment was not timely made.

Issue 4. Advances by Gould to Peat Corporation Debt vs. Equity

From 1956 through 1964 Gould advanced $783,500 to Peat Corp. Respondent contends *294 that such advances were not bona fide debts but rather a series of capital contributions. Alternatively respondent argues that if we determine the conveyances to be a series of loans the repayments must first be allocated to interest and then principal.

We disagree with both assertions. It is our opinion that Gould did in fact intend the creation of a debtor-creditor relationship. In support of this conclusion we note that all formal debt requirements were met. While, as indicated earlier, this is far from controlling, it is 147 certainly relevant. Baker Commodities, Inc., 48 T.C. 374 (1967) , affd. 415 F. 2d 519 (C.A. 9, 1969). Having characterized the Sunrise Harbour transfer as an equity contribution, the debt equity ratio is now supportive of the taxpayers' position. 115 *296 Additional loans were made to Peat Corp. by independent creditors as well as another shareholder of the corporation, reflecting the economic reality of the transaction. Jack Daniel Distillery v. United States, 379 F. 2d 569 , 582 (Ct. Cl. 1967) ; Fin Hay Realty Co. v. United States, 398 F. 2d at 697 . The various corporations, including Peat Corp., had a history of borrowing from various shareholders. Of *295 the $783,500 borrowed over the 10 year period $607,000 of this amount was contemporaneously repaid as compared with $32,200 paid Hunter, Louis and Rosen on the supposed sale of the property, further indicating the validity of the debt. As we noted in C. M. Gooch Lumber Sales Co., 49 T.C. 649 , 657 (1968) : 148 We think it of some significance that the advances were reflected in a "running" rather than "static" open account between petitioner and Harriston Lumber. Petitioner actually collected the net proceeds of sales which it made on behalf of Harriston Lumber. Instead of remitting such proceeds to Harriston Lumber, however, petitioner applied them against the then outstanding balance in the "running" account. This procedure is markedly different from the situation in which straight cash advances are allowed to build up without any repayments.

Therefore, while it is clear that the successful sale of the Sunrise Harbour subdivision was far from certain and that the advances made were done in an attempt to improve the possibility of success, it is the opinion of this Court that in the present instance Gould was more concerned with his status as a creditor than as a shareholder.

Alternatively, respondent contends that Gould should be required to allocate the repayment first to interest and then to principal. This assertion is based solely on the accrual of the interest expense by Peat Corp. which, argues respondent, constitutes an allocation of the future payments to be made between interest and principal by the debtor.

We cannot agree. The accrual of an expense or deduction is not necessarily controlling with respect to how the future payment of such item should be allocated. The order or allocation of a payment should more properly be governed by the pertinent facts which specifically bear upon such allocation including among others, a mutual agreement of the 149 parties or the treatment of such *297 payment on the debtor's books. See George R. Newhouse, 59 T.C. 783 (1973) ; Henry M. Rodney, 53 T.C. 287 , 312-13 (1969) ; Estate of Daniel Buckley, 37 T.C. 664 , 670 (1962) .

In the instant cases, the only evidence presented is a stipulated chart which indicates the amount of money transferred by Gould and the amount of principal and interest repaid by Peat Corp. 116 Without additional facts we cannot take it upon ourselves to reallocate what seems to have already been done by the debtor. There are no facts presented which refute the apparent allocation indicated by the stipulated material.

150

Issue 5. Multiple Surtax Exemption

The next issue to be decided is whether the various corporations are entitled to separate surtax exemptions. Respondent, for years prior to 1964, applying the provisions *298 of sections 1551 and/or 269 , has disallowed the exemptions applicable to Sans Souci Co., Coral Way Co. and the eight corporations which acquired property from Peat Corp. For this same period respondent has disallowed the surtax exemptions of Southern Rock and Fill Co. and Housing Engineers of Florida, Inc., through the application of section 269.For years 1964 and later he has allocated one surtax exemption among the entire group of corporations 117 on the theory that all are part of a controlled group as defined in sections 1561 and 1563 .

Preliminarily we note that petitioners concede the disallowance of the surtax exemptions to the eight corporations which acquired land from Peat Corp. We therefore turn our attention first to the applicability of section 1551 to Coral Way Co. and Sans Souci Co. 151

Section 1551 provides in pertinent *299 part:

SEC. 1551 . DISALLOWANCE OF SURTAX EXEMPTION AND ACCUMULATED EARNINGS CREDIT.

(a) In General. - If -

(1) any corporation transfers, on or after January 1, 1951, and on or before June 12, 1963, all or part of its property (other than money) to a transferee corporation,

(2) any corporation transfers, directly or indirectly, after June 12, 1963, all or part of its property (other than money) to a transferee corporation, * * *

and the transferee corporation was created for the purpose of acquiring such property or was not actively engaged in business at the time of such acquisition, and if after such transfer the transferor or transferors are in control of such transferee corporation during any part of the taxable year of such transferee corporation, then for such taxable year of such transferee corporation the Secretary or his delegate may * * * disallow the surtax exemption (as defined in section 11(d)), * * * unless such transferee corporation shall establish by the clear preponderance of the evidence that the securing of such exemption or credit was not a major purpose of such transfer.

(b) Control. - For purposes of subsection (a), the term "control" means

(1) With respect *300 to a transferee corporation described in subsection (a) (1) or (2), the ownership by the transferor corporation, its shareholders, or both, of stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote or at least 80 percent of the total value of shares of all classes of the stock; or

(c) Authority of the Secretary Under This Section. - The provisions of section 269(b) , and the authority of the Secretary under such section, shall, to the extent not inconsistent with the provisions of this section, be applicable to this section.

It is apparent from the above quoted statute that if (1) property (other than money) is transferred by one corporation to another and (2) the corporation was created for the purpose of acquiring the property, and (3) the 152 transferor corporation, its shareholders or both were in control of the transferee corporation, then the transferee corporation's surtax exemption will be disallowed unless the taxpayer establishes by the clear preponderance of the evidence that the securing of this attribute was not a major purpose of the transfer. 118 *302 Such is a question of fact, New England Foundry Corp., 44 T.C. 150 , 157 (1965) . *301

There can be little doubt that the three requisites have been established. Sunrise, Inc. transferred land to 153 Sans Souci Co. and Coral Glade Co. transferred a portion of its property to Coral Way Co. 119 *303 The two corporations were created to acquire the various parcels of real estate. And the transferor corporations and their shareholders owned 100 percent of the stock of Sans Souci Co. and Coral Way Co. 120 Therefore, the only remaining factor is petitioners' demonstration that securing an additional surtax exemption was not a major purpose of the transfer. In our opinion they have not done so. Rather, the facts clearly demonstrate that at least the dominant motive for the creation of the two corporations was to obtain additional surtax exemptions.

Gould conveyed Sunrise Point and Sans Souci to Sunrise, Inc. Shortly thereafter Sunrise, Inc. conveyed the Sans Souci subdivision to Sans Souci Co. The two subdivisions were adjacent to each other. Similar improvements were required. Both parcels of property were subdivided and sold for the construction of single family homes. All shareholders were the same

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