tioner in this proceeding, had the burden of proving what part of J.S.Y. Ivins, Esq., for the petitioner. M.B. Leming, Esq., John W. Smith, Esq., and John T. Rogers, Esq., for the respondent. The respondent has determined deficiencies in the petitioner's income tax liability as follows: The deficiencies in income tax result from the respondent's determination that Eleanor M. Funk is taxable on the aggregate net income of four trusts of which she is trustee and also a beneficiary. The trusts were created by Wilfred J. Funk, petitioner's husband, on December 29, 1936. The aggregate net income of the four trusts for the taxable years, which has been included in the taxable income of the petitioner, is as follows: The notice of the deficiencies for the years 1938 and 1939 was mailed. to the petitioner within five years after the returns for 1938 and 1939 were filed, but more that three years after the returns for 1938 and 1939 were filed. The petitioner agrees that if all of the net income of the four trusts in question for the years 1938 and 1939 is includible in her gross income for 1938 and 1939, then she understated her correct gross income in each of those years by more than 25 per cent, and, therefore, that the notice of deficiencies in those years was timely under section 275 (c) of the Internal Revenue Code. 893857-51-14 The only question presented is whether the petitioner is taxable on all of the net income of four trusts for the years 1938 to 1941, both years inclusive. The petitioner filed her income tax returns with the collector for the fifth district of New Jersey. This proceeding was originally submitted under a stipulation of agreed facts, with thirteen exhibits, and the question presented was decided under a findings of fact and opinion which was promulgated on September 27, 1946. See Eleanor M. Funk, 7 T. C. 890. The petitioner appealed from the decision of this Court to the Circuit Court of Appeals for the Third Circuit, which remanded the proceeding to this Court with directions for further proceedings not inconsistent with its opinion. See Funk v. Commissioner, 163 Fed. (2d) 796. After remandment of this proceeding to this Court, further evidence was offered under stipulation of the parties, and was admitted. From all of the record of this proceeding as it is now constituted, we make the following findings of fact, and give further consideration to the question presented. FINDINGS OF FACT. Certain facts have been stipulated, and those facts are found as facts. The petitioner, Eleanor M. Funk, is the wife of Wilfred J. Funk, to whom she was married in 1915. Petitioner and her husband reside in Montclair, New Jersey. They are the parents of three childrenJoan, Wilfred, Jr., and Peter. Since at least 1929, the chief business interest of Wilfred J. Funk has been the Funk & Wagnalls Co., of which he has been either president or vice president. This proceeding relates to four trusts, known as trust A, trust B, trust C, and trust D, which Wilfred J. Funk created on December 29, 1936, under written trust indentures. Since their creation, Eleanor M. Funk has been trustee of these trusts, and the corpus of each trust has consisted solely of 125 shares of class C stock of a corporation known as Erwin Park, Inc., plus such accumulations of the annual trust income as the trustee let accumulate and become an addition to the trust corpus. Since their creation, the income of each trust has consisted solely of dividends paid on the class C stock of Erwin Park, Inc. Wilfred J. Funk held in his own name at one time shares of stock of the corporation, Funk & Wagnalls Co. He made transfers of some of this stock at various times, as follows: (1) On April 9, 1929, he transferred 10,345 shares of Funk & Wagnalls stock, in trust, to himself as trustee, for the benefit of Eleanor M. Funk, the income to be paid to her for life, and the corpus to go, upon her death, to such persons as she should appoint by will or deed, the power of appointment being limited to the class of persons who would be entitled to share in her estate according to the New Jersey laws of descent and distribution in the event that she died intestate. (2) At some time prior to April 16, 1929, Wilfred J. Funk gave 10.345 shares of Funk & Wagnalls stock to Eleanor M. Funk. (3) On or about March 5, 1929, Wilfred J. Funk transferred 17,982 shares of Funk & Wagnalls stock to the corporation known as Erwin Park, Inc., which he had caused to be organized on March 1, 1929. The above block of Funk & Wagnalls stock was transferred to Erwin Park, Inc., in exchange for capital stock, and on the books of Erwin Park, Inc., the Funk & Wagnalls stock was carried at the value, as of March 5, 1929, of $250 per share, or a total value of $4,495,500. When Erwin Park, Inc., was organized, Wilfred J. Funk subscribed for all of its capital stock, consisting of class A and class B stock, and 10,000 shares of class A stock were issued to him in exchange for securities which he transferred to the corporation. On April 5, 1929, Wilfred J. Funk created six trusts, known as trust No. 1, No. 2, No. 3, No. 4, No. 5, and No. 6. The beneficiaries of trusts 1, 2, and 3 were the children, Wilfred, Jr., Peter, and Joan. Wilfred J. Funk named himself the trustee of these trusts. He transferred to these trusts a total of 4,998 shares of class A stock of Erwin Park, Inc., or 1,666 shares to each trust. These trusts continued in existence, with Wilfred J. Funk acting as the trustee, and having as their corpus class A stock of Erwin Park, Inc., until 1939, when they were revoked. Wilfred J. Funk named Eleanor M. Funk the trustee of trusts 4, 5, and 6. He transferred, in April, 1929, 4,998 shares of class A stock of Erwin Park to these trusts-1,666 shares to each trust. The beneficiaries of these trusts; in numerical order, were Wilfred, Jr., Peter, and Joan. On December 29, 1936, after a recapitalization of Erwin Park, Wilfred J. Funk revoked trusts 4, 5, and 6, and Eleanor M. Funk transferred the trust property back to him. On December 29, 1936, the same day that the aforesaid trusts were revoked, Wilfred J. Funk created four new trusts-trusts A, B, C, and D (the trusts in question), naming Eleanor M. Funk the trustee of each trust. On April 16, 1929, Eleanor M. Funk created a trust to which she transferred the 10,345 shares of Funk & Wagnalls stock which she had received from Wilfred J. Funk. She named herself the trustee of this trust, and thereafter held the aforesaid stock as trustee. This trust was for the benefit of Wilfred J. Funk, with income payable to him for life, and corpus to go to his appointees under his will or deed, limited to the class of persons who would inherit from him if he died intestate, according to the New Jersey laws of descent and distribution. The trusts of April 9, 1929 (referred to above), and April 16, 1929, created by Wilfred J. Funk and Eleanor M. Funk, respectively, were reciprocal trusts. The facts relating to Erwin Park, Inc., are as follows: Erwin Park, Inc., a Delaware corporation, was organized on March 1, 1929. It became the personal holding company of Wilfred J. Funk. Its address is the address of the residence of Wilfred J. Funk. Under its original certificate of incorporation its total authorized capital stock was 20,000 shares, of no par value, equally divided between class A and class B stock, with voting power vested exclusively in the holders of class B stock. Wilfred J. Funk is the only person who has ever held any of the class B voting stock. Wilfred J. Funk, Eleanor M. Funk, and John D. Murphy of Murphy, Lanier & Quinn, accountants and tax consultants, have served, at all times, as the president, treasurer, and secretary, respectively, of Erwin Park, and also as its directors. Immediately after the incorporation of Erwin Park, Wilfred J. Funk transferred a substantial part of his property, including 17,982 shares of Funk & Wagnalls stock, and other securities, to Erwin Park, in exchange for all of its capital stock. The property transferred to and received by Erwin Park was set up on its books at a value of $6,603,439.32. At special meetings of the directors and stockholders of Erwin Park on December 23, 1936, a resolution was adopted to amend the corporation's charter to effect a recapitalization so as to change the authorized capital stock to 500 shares of class A stock, 1,000 shares of class B stock, and 500 shares of class C stock, each share to have a par value of $100, and only the class B stock to have voting rights. Also, dividends could be declared and paid upon such classes of stock within the absolute discretion of the directors. Following the recapitalization as thus authorized, the holders of old stock exchanged it for new stock, and thereafter all of the new class A stock was held by Wilfred J. Funk as trustee of trusts 1, 2, and 3; and all of the class C stock was held by Eleanor M. Funk as trustee of trusts A, B, C, and D; and all of the voting stock, the class B stock, was held by Wilfred J. Funk. Also, on December 30, 1936, the directors declared a dividend of $160 per share on the class C stock, or a total dividend of $80,000, which was paid to Eleanor M. Funk, as trustee of trusts A, B, C, and D. On December 23, 1937, the directors and stockholders of Erwin Park adopted resolutions to again amend the charter of Erwin Park with respect to the dividend rights of the three classes of stock. This amendment continued the directors' discretion as to the time and amount of dividend payments, but provided that of all dividends paid during any calendar year, 5 per cent be paid on class A stock, 15 per cent on class B stock, and 80 per cent on class C stock. In case of liquidation or dissolution, the holders of all classes of stock are to share equally in the corporation's assets. In 1936, and each year thereafter, Erwin Park declared dividends of virtually all its income for the year. According to the income tax returns of Erwin Park for 1936, 1937, 1938, 1939, and 1940, the net income of the corporation and the total amount of dividends paid on its stock were as follows: During the years 1936 to 1940 Erwin Park paid dividends on the new class A and class B stock (held by Wilfred J. Funk), and on the new class C stock, held by Eleanor M. Funk, trustee of trusts A, B, C, and D, as follows: *2 payments were made in 1937; 1 on March 12 of $6,000, and 1 on December 28 of $148.000. 345,200.00 During the years 1937 to 1940, inclusive, Wilfred J. Funk received from the Eleanor M. Funk trust of April 16, 1929; and Eleanor M. Funk received from the Wilfred J. Funk trust of April 9, 1929, the reciprocal trusts, income as follows: Year W. J. Funk, E. M. Funk, beneficiary beneficiary $72, 415.00 $72, 415.00 15, 517.50 According to the individual income tax returns of Wilfred J. Funk |