insertion of the prohibitory clause in the contract. We are therefore overruling respondent's motion to strike. It must be observed, however, that the particular evidence in question, while admissible, is itself more ambiguous than the contract it was intended to explain, and we have in no way relied upon it in reaching our decision. Reviewed by the Court. Decision will be entered under Rule 50. SMITH, STERNHAGEN, VAN FOSSAN, and LEECH, JJ., dissent. JACOB H. WOOD, PETITIONER, v. CommissIONER OF INTERNAL REVENUE, RESPONDENT. Docket No. 110267. Promulgated January 31, 1944. A corporation was liquidated pursuant to the provisions of sec- Dana Latham, Esq., for the petitioner. OPINION. TURNER, Judge: The respondent has determined a deficiency in income tax against the petitioner for the year 1938 in the amount of $17,500.48. The sole question for determination is whether, for the purposes of section 112 (b) (7) (E) (i) of the Revenue Act of 1938, the earnings and profits of a corporation include that portion of the depletion reserve resulting from the allowance of percentage depletion for the years 1933 to 1938, inclusive, which exceeds the amount which would have been allowable if depletion for those years had been based on cost. The facts have been stipulated and are found as stipulated. The petitioner, formerly a resident of Kilgore, Texas, now resides in Los Angeles, California. He filed his income tax return for the year 1938 with the collector of internal revenue at Dallas, Texas. The petitioner was the owner of a lease covering certain oil properties in Rusk County, Texas. In 1931 he organized a corporation known as Cal-Tex Corporation and transferred the said lease to that corporation for all of its capital stock, except qualifying shares. The qualifying shares were also beneficially owned by petitioner. The Cal-Tex Corporation developed the above described lease, and in due course produced oil and other hydrocarbon substances in substantial quantities. For the years 1931 and 1932 it took no deductions for depletion of the said properties. For the years 1933 to 1938, inclusive, it computed and took deductions for depletion on the percentage basis. For that period the depletion allowances so computed and deducted exceeded by $71,188.87 the amounts which would have been allowable if depletion had been computed on the basis of cost. In December 1938 the Cal-Tex Corporation was liquidated and all of its assets were distributed to petitioner, its sole stockholder. The petitioner, a "qualified electing shareholder," not a corporation, elected to be taxed in respect of the gains derived from the liquidation of CalTex Corporation under the provisions of section 112 (b) (7) of the Revenue Act of 1938.1 It is the determination and contention of the respondent that the earnings and profits of the corporation, for the purposes of applying section 112 (b) (7) (E) (i), supra, included the excess of percentage depletion allowances for the years 1933 to 1938, inclusive, over and above the amounts which would have been allowed for those years if depletion had been computed on the basis of cost. The petitioner concedes that, for the purpose of determining earnings and profits of a corporation available for distribution within the meaning of section 115, the respondent's theory of the percentage depletion reserve is correct and that Charles F. Ayer, 12 B. T. A. 284, cited by the respondent, is authority therefor. He contends, however, that similar treatment of the percentage depletion reserve in deter 1 SEC. 112. RECOGNITION OF GAIN OR LOSS. * (b) EXCHANGES SOLELY IN KIND.— (7) ELECTION AS TO RECOGNITION OF GAIN IN CERTAIN CORPORATE LIQUIDATIONS. (A) GENERAL RULE.-In the case of property distributed in complete liquidation of a domestic corporation, if (1) the liquidation is made in pursuance of a plan of liquidation adopted after the date of the enactment of this Act, whether the taxable year of the corporation began on, before, or after January 1, 1938; and (ii) the distribution is in complete cancellation or redemption of all the stock, and the transfer of all the property under the liquidation occurs within the month of December, 1938 then in the case of each qualified electing shareholder (as defined in subparagraph (C)) gain upon the shares owned by him at the time of the adoption of the plan of liquidation shall be recognized only to the extent provided in subparagraphs (E) and (F). (E) NONCORPORATE SHAREHOLDERS.-In the case of a qualified electing shareholder other than a corporation (1) There shall be recognized, and taxed as a dividend, so much of the gain as is not in excess of his ratable share of the earnings and profits of the corporation accumulated after February 28, 1913, such earnings and profits to be determined as of December 31, 1938, but without diminution by reason of distributions made during the month of December, 1938; mining earnings and profits under section 112 (b) (7) (E) (i), supra, would not serve, but to the contrary would defeat, the purpose for which that section was enacted. Relying on the explanatory statement of Senator George 2 when offering the amendment which became section 112 (b) (7), supra, he argues that the purpose of the section was to permit stockholders, through the dissolution of their corporation within the time specified, "to put themselves back in the same position in which they would have been if they had not incorporated," and, since the petitioner would have been entitled to percentage depletion had he personally remained owner of the property and the amount thereof would not have been subject to tax in his hands, he would, through liquidation of Cal-Tex Corporation, be put back in the same position only if the percentage depletion reserve is excluded in toto from the "earnings and profits" of Cal-Tex Corporation for the purpose of applying section 112 (b) (7) (E) (i), supra. The argument of the petitioner fails for two reasons. In the first place, section 112 (b) (7), supra, shows on its face that it was not designed to completely restore a stockholder to the same income tax position in which he would have been if the corporation had not been formed, and there is nothing whatever in the language of that section to support the view that Congress intended to attribute to the term "earnings and profits" a meaning different in any way from its meaning when used elsewhere in the statute. In the second place, the statement of Senator George does not say that Congress intended, or that the section in question was designed, to restore a stockholder in all respects to the position in which he would have been if no corporation had been formed. He did say that stockholders of certain types of corporations "now wish to get rid of the corporate entity in order to escape the cor The proposed amendment will encourage and facilitate prompt liquidation of personal holding companies and other corporations falling outside the technical classification of personal holding companies which have not been used to evade taxes and which have no substantial accumulations of earnings and profits. For example, assume that a corporation was formed to take title to certain real-estate or unlisted corporate securities which are not readily marketable. By 1938 the property has tripled in value. In the meantime, however, the rents or dividends on such property have been inconsequential, or have been distributed to the stockholders annually. The stockholders now wish to get rid of the corporate entity in order to escape the corporate tax burdens or to put themselves back in the same position in which they would have been if they had not incorporated. The 1938 revenue bill as reported by the Senate committee will impose a tax on the stockholders on liquidation based on the entire appreciation in value even though unrealized from a business point of view. If a liquidation occurs under those provisions, the stockholders will frequently be compelled to resell in order to establish the amount of taxable gain or to raise the amount required to pay the tax. The result is that the bill as reported will continue the tendency of the present law to discourage liquidation of these corporations. At the same time, the property will remain "frozen" in the corporation since any gain resulting from a sale of the assets by the corporation will not be entitled to the benefits of the capital-gain provision when distributed to the stockholders. The proposed amendment would permit postponement of tax on this unrealized appreciation in value on liquidation until the property is sold by the stockholders. By taxing the gain on a liquidation to the extent of accumulated earnings and profits as an ordinary dividend, the application of the amendment would be limited primarily to those corporations which have not been used for tax-avoidance purposes. porate tax burdens or to put themselves back in the same position in which they would have been if they had not incorporated." He then proceeded with the proposition that under the provisions of the bill as it then existed a stockholder, on liquidation of a corporation, would be required to report as gain appreciation in the value of the corporate assets, even though such appreciation had not been realized by the corporation. He then pointed out that "The proposed amendment would permit postponement of tax on this unrealized appreciation in value on liquidation until the property is sold by the stockholders." The amounts here in question have nothing whatever to do with unrealized appreciation on property held by the corporation, but, to the contrary, represent realized gains by the corporation from the development and operation of the oil properties, even though that gain was not taxed to the corporation by reason of the allowance of percentage depletion, which in this case was in excess of the depletion which would have been allowable if based upon the cost of the properties. The amounts here in dispute do in fact represent earnings and profits of the corporation, and under the plain language of section 112 (b) (7) (E) (i), supra, there is no postponement of recognition of gains and profits coming to a stockholder of a corporation liquidated pursuant to the provisions of section 112 (b) (7), supra. The determination of the respondent is accordingly sustained. See and compare Charles F. Ayer, supra, and Estate of John H. Wheeler, 1 T. C. 640. The parties have agreed upon the figures to be used in case of determination of the issue as herein determined, and effect will be given to such stipulation in making the recomputation. Decision will be entered under Rule 50. MAX E. FRIEDMANN, PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Docket No. 110471. Promulgated January 31, 1944. While a suit for divorce was pending in Wisconsin petitioner and his wife entered into a written stipulation in which they settled their property rights and agreed that the wife was to have the custody of their two minor daughters. As a part of the property settlement petitioner agreed to transfer certain property in trust for the benefit of his wife and children. This trust property included certain shares of preferred stock in a corporation of which petitioner was president. In the trust agreement it was provided that if the dividends on the stock did not equal a given amount petitioner would make up the difference and if later all the dividends were paid, the trustee would repay petitioner the amount he had advanced. A judgment of divorce was entered in which the trust agreement was approved. During the taxable years 1935, 1936, and 1937 the trustee distributed all of the trust income to the divorced wife, who used a part thereof (1) The payments made to the ex-wife were not made pursuant (2) In the absence of specific directions in the trust agreement the amount used for the support of the children and conceded by petitioner to be taxable to him can not be included within the amount held taxable to him by reason of his guaranty. (3) The balance of the trust income after deducting the amount held taxable to petitioner by reason of his guaranty and the amount conceded by petitioner to be taxable to him by reason of its use for the support of his children is not taxable to petitioner under section 167 (a) (2) of the Revenue Acts of 1934 and 1936 or under the rule of Helvering v. Clifford, 309 U. S. 331. Leon E. Kaumheimer, Esq., and Frederic Sammond, Esq., for the petitioner. Charles Munz, Esq., for the respondent. OPINION. BLACK, Judge: Petitioner seeks the redetermination of deficiencies in income tax determined against him by the respondent for the calendar years 1935, 1936, and 1937 in the amounts of $3,097.85, $5,402.82, and $6,798.82, respectively. In a statement attached to the deficiency notice the respondent adjusted petitioner's net income as disclosed by his return for each of the taxable years 1935, 1936, and 1937 by adding thereto the respective amounts of $16,311.00, $16,609.07, and $16,953.25, which he labeled "Income from trust" and explained as follows: It is held that the income from the trust created by you under date of January 7, 1935, in connection with a divorce, in lieu of alimony and to provide for the care and maintenance of minor children, is taxable to you within the purview of Sections 22(a), 162(b) and 167 of the Revenue Acts of 1934 and 1936. Petitioner concedes that $3,550 of each of the above amounts added to his net income is taxable to him by reason of its use for the support, maintenance, and education of his minor children, but by appropriate assignments of error he contests the correctness of adding the balance of the above amounts to his net income for each of years involved. For the years 1935 and 1936 the respondent also made other adjustments to petitioner's net income which are not contested by petitioner. For the year 1937 the respondent also adjusted petitioner's net income as disclosed by his return by adding thereto the amount of |