We hold that the petitioner is entitled to a deduction for the taxable year 1955 in the amount of $6,000 on account of the contribution of the locomotive.

Decision will be entered under Rule 50.

NEMOURS CORPORATION, PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 86863. Filed August 10, 1962.

Held, petitioner was availed of during the taxable year for the purpose of avoiding the income tax with respect to its shareholders by permitting earnings and profits to accumulate instead of being divided or distributed. Secs. 531-537, I.R.C. 1954. Cf. Whitney Chain & Mfg. Co., 3 T.C. 1109, affirmed per curiam 149 F. 2d 936 (C.A. 2).

Laurence Graves, Esq., for the petitioner.

Max J. Hamburger, Esq., for the respondent.

The Commissioner originally determined a deficiency in petitioner's income tax for the taxable year 1956 in the amount of $745,302.63 on the theory that petitioner was subject to the personal holding company tax. The Commissioner withdrew this issue at the trial and, by amendment to his answer, determined a deficiency in the amount of $286,281.17 on the theory that petitioner was subject to the accumulated earnings tax in 1956. The correctness of the latter determination is the only issue presented. If the Court should hold for petitioner on this issue, petitioner claims an overpayment of tax in the amount of $73,826.91.

FINDINGS OF FACT.

The facts stipulated by the parties are incorporated herein by this reference.

Petitioner, a corporation organized under the laws of the State of Delaware on December 27, 1924, has its principal office in Suite 1090, DuPont Building, Wilmington, Delaware, and filed its 1956 corporate income tax return with the district director of internal revenue, Wilmington, Delaware.

During the taxable year 1956, petitioner kept its books and accounting records on a cash receipts and disbursements method of accounting, and its taxable period was the calendar year.

At the time of its organization and incorporation in 1924, Paulina du Pont Dean transferred to petitioner securities, real estate, and cash having a cost basis to her of $962,924.19 in exchange for 10,000 shares of petitioner's no-par common stock. On May 23, 1927, J. Simpson Dean, husband of Paulina duPont Dean, transferred certain proper

ties to petitioner in exchange for 3,891 shares of its no-par common stock.

By reason of stock dividends the total no-par common stock issued by petitioner became 36,172 shares by December 29, 1928, of which 28,923 were owned by Paulina duPont Dean and 7,249 by J. Simpson Dean.

The Deans' sole ownership of all of petitioner's outstanding stock, totaling 36,172 shares, continued until December 17, 1954. On that day each transferred by gift 2,000 shares of petitioner's no-par common stock to two trusts created by them in 1937 for the benefit of their three children, with the Wilmington Trust Company named as the trustee of each trust. Thereafter, to and including December 31, 1956, petitioner's outstanding no-par common stock in the total amount of 36,172 shares was owned as follows: Paulina duPont Dean, 26,923 shares; J. Simpson Dean, 5,249 shares; trusts for the benefit of the three Dean children, 4,000 shares.

At all times here material J. Simpson Dean was president, treasurer, and a director of petitioner, and Paulina duPont Dean was vice president and a director.

During the taxable years 1934 to 1955, inclusive, petitioner was a personal holding company within the pertinent provisions of the applicable revenue acts, Internal Revenue Codes, and regulations thereunder, and petitioner filed its returns and paid its taxes as such.

Among the assets transferred by and on behalf of Paulina duPont Dean to petitioner on its organization in 1924 were 333 shares of Delaware Realty and Investment Company no-par common stock. As a result of stock splits and stock dividends, petitioner owned 33,300 shares of Delaware Realty and Investment Company no-par common stock as of December 31, 1956, and such stock produced dividend income to petitioner in 1956 in the total amount of $1,273,725. The total cost basis of such stock on petitioner's books was $33,333.33.

In addition to holding stock, petitioner has been engaged in operating a farm or farms since 1929. Originally these farms covered considerable lands, but during the period 1948 to 1953 petitioner sold these lands to its principal stockholder, Paulina duPont Dean, who almost immediately after acquisition resold them to the three Dean children, who thereupon leased the lands to petitioner.

Petitioner's farm operations commencing in 1929 through the taxable year 1956 resulted in losses for every year. In 1955 the gross income from farm operations was $21,581.25, the farm expenses were $115,298.68, and the net loss was $93,717.43. In 1956 petitioner's gross income from farm operations was $29,133, the farm expenses were $102,766.49, and the net loss amounted to $73,633.49.

On or about April 4, 1956, J. Simpson Dean, hereinafter for convenience sometimes referred to as Dean, was presented with a plan

by tax counsel to remove petitioner from its status as a personal holding company under the revenue laws. The plan contemplated the acquisition by petitioner of income from oil and gas production to the end that such gross income from oil and gas sources would exceed 20 percent of its gross income from all sources. The plan appealed to Dean, not only because of the substantial tax saving which it envisioned for petitioner, but also because it offered petitioner an opportunity to earn and retain a sufficient amount to be able to discharge its existing indebtedness (then amounting to $1,260,000) at the Wilmington Trust Company. Dean also considered the purchase of oil and gas properties by petitioner a form of insurance for his and his wife's estate taxes because such assets could be readily sold by petitioner and converted into cash with which the corporation could redeem all or part of their stock in the event of death.

In furtherance of the plan Lehman Brothers, an investment banking firm of New York City which was active in negotiating for the purchase, sale, and financing of oil and gas properties, was employed by petitioner to find and negotiate for the purchase of oil- and gasproducing properties as well as the financing of such purchases.

Lehman Brothers started negotiations for the purchase of working interests in some 18 gas condensate wells located in and around the Carthage and Bethany gasfields in Panola County, Texas, from groups known as the Hudson group and the F. Kirk Johnson group. However, it was realized by Dean that the receipts from this contemplated purchase would not produce sufficient gross income in 1956 to take petitioner out of the category of a personal holding company in the months remaining in 1956. To obtain such gross income for the year 1956, Dean arranged through Lehman Brothers to purchase an oil production payment from William Associates, Inc., a corporation owned by Lehman Brothers. William Associates had purchased the production payment from Midstates Oil Corporation of Tulsa, Oklahoma, on December 28, 1955, for $3,750,000 and had financed the purchase in its entirety by a loan from the Chase Manhattan Bank (formerly the Chase National Bank) on a note maturing December 26, 1956, at 44 percent per annum.

After applying for a ruling from the Commissioner of Internal Revenue that receipts from an oil production payment would not be considered personal holding company income and receiving assurances to that effect, petitioner purchased a 40-percent interest in the Midstates production payment on June 11, 1956, from William Associates for $990,740.93. On the same day William Associates sold a 50-percent interest in the same production payment to Renappi Corporation, in which Wilhemina duPont Ross and Donald P. Ross (sister and brother-in-law of Paulina duPont Dean) are principal stockholders, and a 10-percent interest to Naed Corporation, in which

the Deans are principal stockholders. On June 11, 1956, the total amount owing under the production payment was $2,476,852.33 and accrued interest.

Petitioner financed the purchase of its 40-percent interest in the oil production payment by borrowing the sum of $990,740.93 from the Chase Manhattan Bank on a promissory note, payable in 8 months, bearing interest at 44 percent per annum, and secured by collateral consisting of 2,000 shares of Delaware Realty and Investment Company stock which the bank valued at $1,200 per share for loan purposes.

At no time from acquisition to final payout did any of the gross proceeds from the oil production payment pass into or through the hands of petitioner. The established procedure for handling such proceeds was that Midstates Oil Corporation transferred and paid over the monthly oil production payment directly to the Chase Manhattan Bank, and the proceeds were then applied by the bank (1) to interest on the loan; (2) an amount equal to two-seventeenths of the amount applied as interest under (1) was credited to a special deposit account of petitioner at the bank; and (3) the balance was applied against unpaid principal of the note. The total deposits in petitioner's special deposit account for the oil production payment at the Chase Manhattan Bank amounted to $1,597.40 in 1956 and $39.57 in 1957. The oil production payment paid out in full in January 1957. Petitioner's loan at the Chase Manhattan Bank was paid in full on January 22, 1957, and the Delaware Realty and Investment Company stock pledged by petitioner was returned by the bank on that date.

The negotiations by Lehman Brothers in petitioner's behalf with the Hudson-Johnson groups concerning the purchase of working interests in some 18 gas condensate wells resulted in an agreement on a purchase price of $3 million for such interests. On or about August 8, 1956, petitioner purchased the working interests (as of July 1, 1956) for a consideration of $3 million, and the following day petitioner assigned a 10-percent undivided interest in them to Naed Corporation for $300,000.

Through arrangements made by Lehman Brothers, petitioner financed its 90-percent share of the working interests acquired from the Hudson-Johnson groups at a cost to it of $2,700,000 by borrowing the sum of $2,800,000 on August 8, 1956, as follows:

(a) Petitioner borrowed $800,000 from the Swiss Bank Corporation (New York Agency), New York, New York, on a promissory note payable in equal monthly installments of $22,000, at interest of 5 percent per annum. The term of the note was 6 months, provided that if not in default "said term shall be extended for not exceeding five additional successive six-month periods" unless the Swiss Bank

should notify petitioner of cancellation. Petitioner had the right to prepay the note or any part thereof, provided there was also prepayment on its loans, hereinafter described, from the American Express Company, Inc., and the Cleveland Trust Company. Petitioner pledged 1,350 shares of Delaware Realty and Investment Company stock as collateral which the Swiss Bank valued at $1,330 per share for purposes of the loan. As of December 31, 1956, petitioner had prepaid installments on the loan covering the months of January, February, and March, 1957, in the amount of $66,000. Petitioner paid off the loan in full in accordance with its terms on or about April 3, 1959.

(b) Petitioner borrowed $1,500,000 from the American Express Company, Inc. (New York Agency), New York, New York, on a promissory note payable in equal monthly installments of $42,000 at interest of 5 percent per annum. The term of the note was 6 months, with provision for five 6-month extensions and prepayment provisions similar to those contained in the Swiss Bank note. Petitioner pledged 2,500 shares of Delaware Realty and Investment Company stock as collateral which the American Express Company valued in the aggregate at $3 million for purposes of the loan. As of December 31, 1956, petitioner had prepaid installments on the loan covering the months of January, February, and March, 1957, in the amount of $126,000. Petitioner paid off the loan in full on or about April 3, 1959, in accordance with its terms.

(c) Petitioner borrowed $500,000 from the Cleveland Trust Company, Cleveland, Ohio, on a promissory note maturing August 8, 1959, and payable in equal monthly installments of $14,000 at interest of 5 percent per annum. The note provided that either party could terminate the note with 30 days' written notice. Petitioner pledged 850 shares of Delaware Realty and Investment Company stock as collateral. As of December 31, 1956, petitioner had prepaid installments on the loan covering the months of January, February, and March, 1957, in the amount of $42,000. Petitioner paid off the loan in full in accordance with its terms on or about August 8, 1959.

The difference of $100,000 between the $2,800,000 borrowed by petitioner on August 8, 1956, and the $2,700,000 which petitioner paid for its 90-percent share of working interests in the gas condensate wells was made available to Lehman Brothers to pay a $90,000 commission for negotiating the purchase and financing of the working interests. The balance of $10,000 was retained by petitioner.

Petitioner's aggregate monthly payments due on the notes to the Swiss Bank, the American Express Company, and the Cleveland Trust Company amounted to $78,000, commencing on September 8, 1956. Because the larger part of petitioner's income was dividend income received quarterly on March 15, June 15, September 15, and