OPINION.

ARUNDELL, Judge: Before proceeding to the only issue argued by the parties, we shall dispose of petitioner's claim of overpayment of its income tax for the fiscal year ended June 30, 1944. No determination of a deficiency in income taxes has been made by respondent that would confer jurisdiction upon this Court whereby it could find an overpayment of income taxes. Since the income tax and excess profits tax are separately imposed, a determination of a deficiency in the latter will not give this Court jurisdiction of a determination of an overassessment in the former. Difco Laboratories, Inc., 10 T. C. 660. See also Pioneer Parachute Co., 4 T. C. 27. Accordingly, petitioner's claim for overpayment of income taxes for 1944 is dismissed for lack of jurisdiction.

Concerning the excess profits tax deficiency determined by respondent, the only issue raised by petitioner is whether the $97,500 borrowed by petitioner in 1942 for the sole purpose of purchasing single premium life insurance policies of face amount of $100,000 each on the lives of Leeds and Madan, its two principal stockholders and officers, may properly be included in petitioner's borrowed invested capital as defined by section 719, Internal Revenue Code.1

Respondent's Regulations 112, section 35.719-1,2 provides that to be includible in borrowed invested capital, an indebtedness must be (1) bona fide and (2) incurred for business reasons. Petitioner attacks the regulations as an invalid exercise of the respondent's authority going beyond the unambiguous terms of the statute. We regard this contention of petitioner's as foreclosed by our decision in HartBartlett-Sturtevant Grain Co., 12 T. C. 760, 769; affd., 182 Fed. (2d) 153 (CA-8, May 5, 1950), where we sustained the validity of the cited regulations. See also Globe Mortgage Co., 14 T. C. 192.

1 SEC. 719. BORROWED INVESTED CAPITAL.

(a) BORROWED CAPITAL.-The borrowed capital for any day of any taxable year shall be determined as of the beginning of such day and shall be the sum of the following: (1) The amount of the outstanding indebtedness (not including interest) of the taxpayer which is evidenced by a bond, note, bill of exchange, debenture, certificate of indebtedness, mortgage, or deed of trust, plus,

(b) BORROWED INVESTED CAPITAL.-The borrowed invested capital for any day of any taxable year shall be determined as of the beginning of such day and shall be an amount equal to 50 per centum of the borrowed capital for such day.

SEC. 35.719-1 BORROWED INVESTED CAPITAL-The borrowed invested capital for any day of the taxable year is 50 per cent of the borrowed capital for such day determined as of the beginning of such day. Borrowed capital is defined to mean:

(a) Outstanding indebtedness (other than interest, but including indebtedness assumed or to which the taxpayer's property is subject) of the taxpayer which is evidenced by s bond, a promissory note, bill of exchange, debenture, certificate of indebtedness, mortgage, or deed of trust, plus

In order for any indebtedness to be included in borrowed capital it must be bona fide It must be one incurred for business reasons and not merely to increase the excess profits credit. If indebtedness of the taxpayer is assumed by another person it ceases to be bar rowed capital of the taxpayer. For such purpose an assumption of indebtedness includes the receipt of property subject to indebtedness.

It is indisputable that the indebtedness which petitioner incurred to purchase the insurance policies was bona fide. The debt was in the form of promissory notes given to a New York bank and was secured by the policies themselves. The only question which confronts us is whether the indebtedness satisfies the second requirement of respondent's regulations, viz., that it be insured for business reasons. In determining whether the money borrowed solely to purchase single premium life insurance policies on the lives of petitioner's two principal officers was borrowed for business reasons of petitioner, we much bear in mind that these two officers owned all of the common stock of petitioner. They determined and controlled all of petitioner's actions. When the transactions of such a closely held corporation become involved in tax litigation, its activities must be examined with a realistic eye to decide whether a similarly situated, diversely held corporation would pursue a like course of action or whether instead the corporate cloak is used to achieve discriminatory tax advantages for the controlling stockholders. We do not mean to imply, however, that a corporation, even when closely held, may not legitimately choose from two or more possible methods the one which will result in the lesser tax. It is not the province of the Commissioner to then say that a different method should have been adopted because it would have increased the Government's take. The line separating legitimate tax-minimizing corporate activities from tax-evading transactions utilizing the corporate guise may be difficult to draw as a generalization, but it becomes much easier when applied to a particular situation.

Here, the evidence is convincing, and we have found as a fact, that the insurance policies were purchased for reasons personal to Leeds and Madan rather than to benefit the petitioner. By the terms of the trust created in January, 1946, the petitioner transferred these policies to the trustee in order to provide funds for the purchase of the stockholdings in petitioner of the first to die of Leeds and Madan. These provisions make it abundantly evident that the true purpose of the insurance policies, and thus likewise the indebtedness incurred to purchase them, was to provide available funds at the death of either Leeds or Madan, so that the survivor would be readily enabled to purchase his deceased associate's interest. The benefit to the petitioner of such a transaction appears highly remote. Instead of being supplied with funds to tide it over a period of adjustment upon the death of a key employee, petitioner, under the trust agreement, would be compelled to use the life insurance proceeds to purchase and retire the stockholdings of its decedent-officer.

It may be noted that the trust arrangement was not indispensable to the insurance-stock purchase scheme worked out by Leeds and Madan. The trust provisions simply bring into clearer focus the

real purpose of the insurance. Without the trust, the survivor of Leeds and Madan at the death of his associate could have caused petitioner to apply the proceeds of the policies on the decedent's life to retire the stock owned by the decedent. Since retirement of the decedent's one-half of the common stock would leave the survivor as sole owner of all the outstanding common stock, the net effect would be to give him as full ownership and control as though he had purchased the decedent's stock directly from the decedent's estate. The only advantage of the trust arrangement was that Leeds and Madan could thereby agree in advance to the price at which the decedent's shares would be purchased and thus obviate the possibility of any bargaining difficulties between the survivor and the decedent's estate. Further, they could do so without irrevocably binding themselves to the price initially set out in the trust instrument, since the price fixed in the trust was declared subject to change by agreement of the parties. Also, the trust could be terminated at will by either Leeds or Madan during their joint lives by written notice to the trustee and parties. All of these provisions emphasize the manner in which any possible interest of petitioner in insuring the lives of key employees was subordinated to the interest of its two common stockholders, Leeds and Madan.

As petitioner was committed under the trust agreement to use the proceeds of the policies to purchase the holdings of the first to die of Leeds and Madan, it is evident that the indebtedness which it incurred to purchase the policies would never enter into petitioner's working capital so long as the reason for the policies was the necessity of their inclusion in the stock purchase plan. As was said in HartBartlett-Sturtevant Grain Co. v. Commissioner, 182 Fed. (2d) 153:

Petitioner's argument fails to convince that its actions have brought it under the wording of Section 719 or Regulation 112, supra. We note that the statute does not provide for a credit based on a taxpayer's total asset value, but only upon invested capital. And while the sums borrowed by petitioner do constitute borrowed capital they do not constitute borrowed invested capital. The sums borrowed were never actually invested as a part of petitioner's working capital. they were never utilized for the earnings of profits and they were never subject to the risk of petitioner's business. Cf. La Belle Iron Works v. United States. 256 U. S. 377, 388, 389; Commissioner v. South Texas Co., 333 U. S. 496, 497-498; West Construction Co. v. Commissioner, 7 T. C. 974, 978; Player Realty Co. v. Commissioner, 9 T. C. 215, 218.

Concluding, as we must from the evidence before us, that the policies here were purchased as part of a stock purchase plan for the personal interests of petitioner's two common stockholders and not for any business purpose of petitioner itself, we must approve the respondent's determination.

Decision will be entered under Rule 50.

FRANK HODOUS, PETITIONER, v. CommissionER OF INTERNAL
REVENUE, RESPONDENT.

Docket No. 16670. Promulgated June 28, 1950.

Between 1935 and 1943, petitioner entered into agreements with stockholders of a corporation holding defaulted farm mortgages. The agreements provided that the stockholders would endorse their shares in blank and give them to petitioner for the purpose of compelling the management of the corporation to liquidate. If successful, petitioner was to receive a percentage of the amounts paid to the shareholders in liquidation. If unsuccessful, he was to return the shares to the stockholders.

(1) The sums received by petitioner in 1943, 1944, and 1945 as the percentage of dividends in liquidation stipulated in his agreements with the stockholders held compensation for his services in bringing about the liquidation and taxable to him as ordinary income. Expenses incurred in 1943 in connection therewith determined.

(2) Business expenses incurred by petitioner in 1943, 1944, and 1945, in connection with his employment as an agent to sell the corporation's farm properties, determined.

James R. Felt, Esq., for the petitioner.
Douglas L. Barnes, Esq., for the respondent.

Respondent determined deficiencies in petitioner's income tax liability for the taxable years 1943, 1944, and 1945 in the respective amounts of $722.92, $738.81, and $2,357.76. These deficiencies involve three issues raised by the pleading:

(1) Whether payments received by petitioner in the above years in the respective amounts of $4,478.20, $5,602.10, and $6,545.56 constitute compensation for services and thus are taxable as ordinary income as determined by respondent, or whether these amounts constitute a return of capital as claimed by petitioner.

(2) Whether respondent properly disallowed the following portion of business expenses claimed by petitioner in the above years:

(3) Whether petitioner incurred any deductible expenses in connection with the receipt of taxable income in the amount of $2,794.38 from certain grain sales in 1945. This issue was abandoned by petiioner on brief.

FINDINGS OF FACT.

Petitioner is an individual residing at Billings, Montana. His income tax returns on the cash receipts and disbursements method for the years here involved were filed with the collector of internal revenue at Helena, Montana. The returns were prepared for him by a firm of certified public accountants in Billings. Previous to 1943, petitioner did not file any tax returns because he did not have the required amount of income.

The Midwest Land Co. (hereinafter referred to as Midwest) was a Delaware corporation, with its principal office at Billings, Montana. It was organized shortly after World War One by R. B. Ballard to acquire farm mortgages or farm mortgage bonds in exchange for its stock. Farm mortgages were then in default in large numbers throughout the northwest. Ballard thought the slump in farm land values was temporary and conceived the idea of acquiring defaulted mortgages and holding them until a return of farm values would make foreclosure profitable.

The stock of Midwest consisted of class B, the full voting stock. most of which was owned by the Ballard family, and class A stock. which had a preference on liquidation and could vote only on the question of liquidation. The class A stock was widely held. A majority of both A stock and B stock was required to liquidate the company. In 1935 a small group of class A stockholders approached petitioner, who was then living in LaCrosse, Wisconsin, and asked if he would be willing to investigate the affairs of Midwest to determine whether anything could be salvaged from their investment. Petitioner had previously been successful in liquidating a debenture loan in another matter for these shareholders and because of his success in this matter they thought he might help them realize something from their investment in Midwest. After a preliminary investigation, petitioner agreed to carry out the project and to contact other stockholders to secure their cooperation.

Between the years 1935 and 1943, petitioner located most of the class A stockholders of Midwest, principally in the states of Wisconsin, North Dakota, and Montana, and was successful in entering into agreements with the majority of them to assign their shares in blank and turn them over to him for the purpose of bringing about a liquidation.. The agreement with the stockholders provided that if petitioner were successful in bringing about a liquidation he would receive a stipulated percentage of the amount paid to each of the shareholders in liquidation. If unsuccessful, he was to return their shares. In the majority of cases the agreements provided that petitioner would receive 35 per cent of the amount received in liquidation, but the percentages varied in other agreements from 10 per cent to 40 per cent.