Percival and Emma Haines have five sons. The dates of their birth are as follows:

Lewis Haines, September 7, 1928.

Roger Haines, September 30, 1932.

Leland Haines, February 28, 1936.

Marion Haines, May 30, 1943.

Richard Haines, July 15, 1945.

During the period here involved Elkhart never formally issued stock certificates and it did not have a stock record book.

On October 23, 1953, Elkhart, as owner, by Percival Haines, president, applied for and obtained from the City of Elkhart, a permit to erect a building to be occupied as a warehouse at 1535 Fieldhouse Avenue on acreage in an industrial1962 U.S. Tax Ct. LEXIS 195">*204 zone with a floor area of 162,000 square feet at an estimated cost of $ 150,000. Haines & Haines was named as builder and the permit fee was $ 678.

37 T.C. 919">*923 On November 17, 1953, U.S. Rubber as "Tenant" and Elkhart, by Percival J. Haines, its president, as "Landlord," executed a "Lease and Agreement" with respect to the Elkhart building, sometimes referred to herein as building No. 1. The agreement recited that the landlord was the owner of certain described property; that it agreed to cause a building to be erected upon the property which should "conform to plans and specifications therefor, which the Landlord has caused to be prepared and which have been submitted to and approved by the Tenant"; that the landlord agreed immediately to commence the erection of the building which was to be ready for substantial occupancy within 120 days, except for circumstances beyond the landlord's control; that the term of the tenancy was to commence upon the date the building was ready for substantial occupancy; that the initial term was for a period of 15 years; that the tenant should have four options to extend the tenancy for four successive additional periods of 5 years each; that the rental1962 U.S. Tax Ct. LEXIS 195">*205 for the first 5 years should be $ 418,984.80, being $ 83,796.96 per year, payable monthly; that for the succeeding 10 years the rental should be $ 545,937.60, or $ 54,593.76 per year, payable monthly; that the rentals were to be based upon an interior area of 162,240 square feet and a square foot rental of 51.65 cents per year for the first 5 years and 33.65 cents per year for the succeeding 10 years; that with respect to the optional periods, if the tenancy should be extended, the rental would be at a rate agreeable to both parties, or if no agreement should be reached, determined by arbitration. By specific provision, Elkhart agreed that it would provide "a reliable secondary water supply for sprinklers and hydrants, consisting of a one thousand (1000) gallon per minute, one hundred (100) pound pressure, manually and automatically controlled, electrically driven, centrifugal fire pump, to be housed in a detached non-combustible pump house, said pump to take suction from a one hundred fifty thousand (150,000) gallon above ground reservoir or storage tank."

The lease became effective on May 15, 1954, on which date the building was completed for substantial occupancy.

Concord was 1962 U.S. Tax Ct. LEXIS 195">*206 incorporated on June 2, 1954. From the date of its incorporation through the taxable years, the holding of its outstanding stock and the relationship of the stockholders to each other were as follows:

37 T.C. 919">*924 Concord's first board of directors was composed of Percival J. Haines, Emma Haines, and Violet Haines.

As was true of Elkhart, Concord never formally issued any stock certificates and it did not have a stock record book.

In the articles of incorporation of both Elkhart and Concord the address of the principal office of each corporation was shown as 2620 South Main Street, Elkhart, which was the address of Percival J. Haines, who was named by each corporation as resident agent in charge of its office. The articles of incorporation were the same except for variations as to the name of their incorporators and (1) Concord's stock had a value of $ 50 per share as against $ 100 for Elkhart's; 1962 U.S. Tax Ct. LEXIS 195">*207 (2) Concord had provision for three directors and Elkhart for five, and (3) none of Haines' sons was named as director of Concord. In both instances the amount of paid-in capital with which each corporation began business was stated as "$ 1,000.00 or more."

At the time Concord was incorporated, it was Haines' understanding that it would have a separate surtax exemption as in the case of Elkhart.

On July 29, 1954, Haines & Haines, as owner, obtained from the City of Elkhart a permit to erect a one-story building to be occupied as a warehouse at 1535 Fieldhouse Avenue, being the same address as that given for the Elkhart warehouse. The warehouse was to have a floor area of 100,000 square feet and $ 200,000 was shown as the estimated cost. Haines & Haines was named as the builder and the permit fee was $ 451.

On January 4, 1955, U.S. Rubber, as tenant, and Concord, as landlord, executed a lease in terms similar in most respects to that between U.S. Rubber and Elkhart, covering the building sometimes referred to herein as building No. 2. The term of the tenancy was 15 years, with the tenant having four options to extend the term for four successive periods of 5 years each. The rental1962 U.S. Tax Ct. LEXIS 195">*208 for the first 5 years was fixed at $ 262,660.90, or $ 52,532.18 per year, payable monthly. For the succeeding 10 years the rental was to be $ 342,247.40 per year, payable monthly. The rental was based on an interior area of 101,708 square feet at the rate of 51.65 cents per square foot for the first 5 years and 33.65 cents per year for the succeeding 10 years. The Concord lease became effective in January 1955. It was specified that the "sprinkler system shall be connected by an eight (8") inch pipe to the storage tank provided in * * * a lease dated November 17, 1953 between Elkhart Warehouse Corporation and United States Rubber Company. Said secondary water supply shall be always available to Tenant as long as this lease, as it may be extended or renewed, shall continue in force."

The Elkhart lease recited that U.S. Rubber desired "to lease building space * * * to be used for warehouse and office purposes." The 37 T.C. 919">*925 Concord lease recited that U.S. Rubber desired to lease building space "to be used for warehouse purposes." In each lease it was provided that the building therein covered be equipped with wiring, piping, plumbing, and heating equipment.

The deed from Elkhart1962 U.S. Tax Ct. LEXIS 195">*209 Industries to Elkhart covering the land on which Elkhart's building had been constructed was executed on June 18, 1954. The consideration was stated as $ 1 and the land area was shown as 11.7 acres. The deed from Elkhart Industries to Concord for the land on which Concord's building was constructed was executed September 28, 1955. The consideration was stated as $ 1 and the land area as 6.78 acres. The deed carried a provision showing that the west 20 feet of land described was subject to an easement of the New York Central Railroad Company.

The Elkhart building has a frontage of 352 feet on Fieldhouse Avenue on the north. The west 32 feet is the frontage of the office area, back of which are a hallway, toilets, and a boilerroom, which overall have a depth of 130 feet. The warehouse area to the east has a frontage of 320 feet on Fieldhouse Avenue and a depth of 494 feet. The rear of Elkhart and Concord is a continuous wall of 320 feet for the Elkhart area and 280 feet for the Concord area which is immediately west of Elkhart. From the rear wall the Concord space extends north 364 feet toward Fieldhouse Avenue, then east 280 feet to the Elkhart wall, the east 32 feet being 1962 U.S. Tax Ct. LEXIS 195">*210 to the rear of the office space, hallway, toilets, and boilerroom, which are a part of the Elkhart building. Extending south from Fieldhouse Avenue to Concord's north wall is a paved area giving entrance to a truck dock pull-in area which will accommodate six trucks. Similarly, Elkhart on its north side has a truck dock pull-in area which will accommodate nine trucks. In the south half of its east wall Elkhart has two separate overhead doors from which there are two driveways to 15th Street on the east. Across the west side of the Concord warehouse area is a railroad siding serving seven openings in Concord's west wall. The Elkhart area has no railroad siding and its access to railroad shipping is through Concord. Similarly, Concord has no office area, toilet space, or heating facilities except from Elkhart. The Elkhart and Concord areas are divided by a common firewall with three fire doors. The outer walls of both Elkhart and Concord are constructed of 8-inch hollow concrete blocks with simulated brick exterior. The common firewall between the two similarly consists of concrete blocks, except that the blocks are filled with cement. The three fire doors are each 10 feet 1962 U.S. Tax Ct. LEXIS 195">*211 wide and 8 feet high.

Elkhart has a detached reservoir approximately 100 feet east of its southeast corner. Each warehouse area has a sprinkler system for fire prevention. Concord's water supply, electric power, and heat are furnished from Elkhart's property and facilities. Concord has no 37 T.C. 919">*926 separate meter for recording the electric current consumed in its warehouse space.

When Haines started construction of the Elkhart building he arranged with suppliers for materials and supplies for both buildings at the same prices. A substantial portion of the supplies and materials delivered to the Concord site and used in the construction of its building was paid for by Elkhart. As shown by the books of Elkhart and Concord, the total cost of the two structures was $ 553,119.53, of which $ 460,824.78 represented the cost on the books of Elkhart and $ 92,294.75 the cost shown on the books of Concord. The total debits shown by Elkhart on its books at May 31, 1954, 16 days after the completion of its building, amounted in the aggregate to $ 220,571.62. When the buildings were completed, Haines caused the total cost of $ 553,119.53 for the two buildings to be allocated between and entered1962 U.S. Tax Ct. LEXIS 195">*212 on the books of Concord and Elkhart on the basis of 162,240 square feet for Elkhart and 101,708 square feet for Concord. After the allocation, Elkhart's cost was shown on its books as $ 337,402.90 and Concord's cost was shown on its books as $ 215,716.63. There was no payment, however, by Concord to Elkhart for the amounts expended by Elkhart and shown by the allocation as cost of Concord's building, but at January 31, 1955, $ 167,980.42 was shown on Elkhart's books as a receivable by Elkhart from Concord and a similar amount was shown on Concord's books as an account payable by Concord to Elkhart. This amount was reduced by $ 5,000 during 1955 to show Elkhart's receivable and Concord's payable at the end of the year as $ 162,980.42, which was the balance shown by Elkhart at the end of its fiscal year, July 31, 1956, and by Concord at the end of its fiscal year, September 30, 1956. Among the items paid by Elkhart for the account of Concord were $ 5,000 paid to a subcontractor for concrete work and $ 40,000 on a loan from a bank, together with interest of $ 251.39.

In planning the construction of the Elkhart and Concord buildings, Haines obtained a commitment from Lincoln National1962 U.S. Tax Ct. LEXIS 195">*213 Insurance Company, hereafter referred to as Lincoln National, for permanent financing of the completed project, which made it possible to obtain construction money from a bank or banks. This commitment of Lincoln was based primarily on the agreement of U.S. Rubber to lease the entire warehouse.

On July 21, 1954, Elkhart executed a mortgage on its land and building to Lincoln National, which mortgage carried the following provision:

To secure the payment of the principal sum of THREE HUNDRED FIFTY THOUSAND AND NO/100 ($ 350,000.00) Dollars, and interest, evidenced by Mortgagor's one promissory note of even date herewith, in said principal amount payable according to its terms to the order of the Lincoln National Insurance Company with final installment payable on the first day of November 1964, * * *

37 T.C. 919">*927 Pursuant to the mortgage, Elkhart, on July 21, 1954, assigned its lease with U.S. Rubber Company to Lincoln National as further security under the mortgage.

On March 7, 1956, Concord and Elkhart, as mortgagors, joined in a mortgage of their properties to Lincoln National to secure payment of the principal sum of $ 200,000, evidenced by Concord's note in that amount, Elkhart's1962 U.S. Tax Ct. LEXIS 195">*214 liability under the mortgage being subject to the prior mortgage of its property on July 21, 1954, to Lincoln National to secure the payment of its note for $ 350,000.

Concord, as had Elkhart, assigned its lease with U.S. Rubber to Lincoln National as further security for its mortgage indebtedness.

The books of Elkhart and Concord are kept by the same bookkeeper in the office of Haines & Haines at 2620 South Main Street, in Elkhart. 2620 South Main Street is the principal office of each corporation, as shown by the articles of incorporation.

Except for interest income in the amount of $ 710.21 received by petitioner during the taxable year ended September 30, 1956, the gross income it received during the taxable years herein was derived solely from the lease with U.S. Rubber.

The respondent in his determination of deficiencies determined that the $ 25,000 surtax exemption claimed by petitioner on its returns for the fiscal years ended September 30, 1955, and September 30, 1956, was "not allowable within the purview of section 269 and section 1551 or any other section of the Internal Revenue Code of 1954."

The principal purpose for the organization of Concord as a separate corporation1962 U.S. Tax Ct. LEXIS 195">*215 and the acquisition by Percival J. Haines of 54 percent of its voting stock was to avoid Federal income tax by securing the benefit of a surtax exemption, which would not otherwise have been available.

OPINION.

In imposing the surtax on the taxable income of a corporation, section 11(c) of the Internal Revenue Code of 1954 provides an exemption of $ 25,000. In section 269(a), ¹ it is provided that if a person acquires control of a corporation and the principal purpose of such acquisition is evasion or avoidance of Federal income tax by securing the benefit of a deduction, credit, or other allowance 37 T.C. 919">*928 which such person or corporation would not otherwise enjoy, then the deduction, credit, or allowance shall not be allowed. For the purposes of section 269(a)(1), it is provided that "control means the ownership of stock possessing at least 50 percent of the total combined voting power of all classes of stock entitled to vote * * *."

1962 U.S. Tax Ct. LEXIS 195">*216 The respondent in his determination of deficiencies has determined that Concord was organized for the purpose proscribed in section 269(a)(1) and that it is not, therefore, entitled to the $ 25,000 exemption provided in section 11(c) for corporate surtax purposes. It is not disputed that both Elkhart and Concord were organized by Percival J. Haines or that Haines acquired at the time of organization and has since owned and held more than 50 percent of the voting stock of both Elkhart and Concord.

The facts show that Haines was advised, possibly in the early part of 1953, that U.S. Rubber was interested in a "150,000 square foot" warehouse in or near the city of Elkhart to replace its then footwear warehouse located in another area and was requested to prepare and submit a proposal for the construction and leasing of such a warehouse. Before his proposal was presented he was further advised that U.S. Rubber wanted an additional warehouse of 100,000 square feet to be used for automobile mats and foam rubber.

On or about April 6, 1953, Haines submitted a proposal to U.S. Rubber that "we" propose to form a corporation or corporations for the purpose of erecting two buildings, with both1962 U.S. Tax Ct. LEXIS 195">*217 buildings to be provided with sprinkler systems for fire prevention and equipped with adequate sewer, water, heating, and lighting facilities, the lights to be fluorescent. The larger building was to be ready for occupancy on October 1, 1953, and the smaller one to be available July 1, 1954. U.S. Rubber notified Haines on April 15, 1953, that his proposal had been accepted.

Haines thereafter obtained a commitment from Elkhart New Industries Trust Fund, an adjunct to the Elkhart Chamber of Commerce, for the land required for the project, and on June 22, 1953, Elkhart Industries formally approved the beginning of construction of "building Number 1 for warehouse use by the U.S. Rubber Company" on the land provided. Building No. 1 was constructed under the ownership of Elkhart Warehouse Corporation, incorporated August 4, 1953, with Haines acquiring 54 of the 100 shares of the stock issued.

In the early discussions U.S. Rubber had given consideration to the construction of two detached warehouse buildings with the railroad spur running between them, but concluded that its purpose was better served by having the structures separated only by a common wall.

In his planning of the construction, 1962 U.S. Tax Ct. LEXIS 195">*218 Haines made arrangement with the building material suppliers for the materials and supplies necessary 37 T.C. 919">*929 for the construction of both buildings at prices common to both. He also obtained a commitment from Lincoln National for permanent financing of the completed project, which made it possible to obtain the required construction money from a bank or banks. This commitment was based on the agreement of U.S. Rubber to lease the two buildings when completed.

In the Elkhart lease, which was executed on November 17, 1953, it was recited that U.S. Rubber desired "to lease building space * * * to be used for warehouse and office purposes." In the Concord lease, which was executed on January 4, 1955, it was recited that U.S. Rubber, desired to lease space "to be used for warehouse purposes." In each lease, it was provided that the building covered be equipped with wiring, piping, plumbing and heating equipment, and a sprinkler system. In the Elkhart lease it was specified that Elkhart should provide a reliable secondary water supply for sprinklers and hydrants, by means of a 150,000-gallon aboveground reservoir or storage tank, and a manually and automatically controlled, electrically1962 U.S. Tax Ct. LEXIS 195">*219 driven centrifugal fire pump, to be housed in a detached noncombustible pumphouse, the pump to have a capacity of 1,000 gallons per minute, at a 100-pound pressure. In the Concord lease it was specified that its sprinkler system should be connected by an 8-inch pipe to the storage tank provided for in the Elkhart lease. It was further provided that this secondary water supply from Elkhart should be always available to U.S. Rubber as long as its lease, as extended or renewed, should continue in force.

When completed the building belonging to Elkhart was a complete operable warehouse facility. Built into the unit was the space for the office necessary to the management and operation of the warehouse, a heating plant, and toilet facilities. Opposite the southeast corner of the building was a reservoir for the purpose of supplying water necessary to the operation, including the sprinkler system for fire prevention. The outer walls were built of hollow concrete blocks except that the blocks composing the west wall were filled with cement so as to constitute a firewall. It was at that wall building No. 2, when constructed by Concord, was to be attached and become a part of the integrated1962 U.S. Tax Ct. LEXIS 195">*220 warehouse facility. The Elkhart building, including the west wall, was entirely on land belonging to Elkhart.

The Elkhart building was completed for substantial occupancy and the lease to U.S. Rubber became effective May 15, 1954.

As constructed the Concord building was attached to the Elkhart building so as to utilize Elkhart's west wall as its east wall. Only the north, south, and west walls were on Concord's property. Concord had no office space or facilities, and no heating plant or toilet facilities. It received its water through Elkhart and it was dependent upon 37 T.C. 919">*930 Elkhart's reservoir for its secondary water supply. Its electrical wiring came through the Elkhart building and there was no separate meter to measure the current used as between the Elkhart space and the Concord space.

It would thus appear that separately and independently of Elkhart, Concord did not have an operable warehouse facility and there is no evidence which indicates any intention that it should. Haines himself acknowledged that such was the case in his testimony that if Concord should have a renter other than that of Elkhart "we will have to put in a new boiler and toilets, revamp the wiring, 1962 U.S. Tax Ct. LEXIS 195">*221 and probably build an office building." It follows, we think, that at the most the Concord structure was an appendage to the Elkhart warehouse and aside from the added truck dock and the railroad siding merely supplied additional storage space.

Not only was there only one arrangement with the suppliers for materials and supplies for both the Elkhart and Concord buildings, but in their construction there was no segregation of actual cost as between the two. To the contrary, the total cost was divided between the two buildings by allocation according to the square footage of the total warehouse space.

The major portion of the materials and supplies going into the construction of Concord's structure, although delivered on the Concord site, was charged to Elkhart and was paid for by Elkhart. Elkhart also repaid the bank for some $ 40,000 of the construction money which had been received for the purpose of constructing the Concord building. In all, Elkhart actually supplied $ 167,980.42 of the $ 215,716.63 arrived at through the above allocation as the cost of the Concord building and carried on its books as such cost. The $ 167,980.42 representing the payments so made by Elkhart was1962 U.S. Tax Ct. LEXIS 195">*222 duly entered on the books of account set up for Elkhart and Concord and was reflected on Elkhart's books as a receivable and on Concord's books as an account payable. At the time of the trial the indebtedness so shown against Concord had been reduced by $ 5,000.

Under the commitment which Haines had with Lincoln National, Elkhart executed a mortgage to Lincoln National on July 21, 1954, to cover the permanent financing of its property. Concord executed its mortgage to Lincoln National on March 7, 1956. In each instance the U.S. Rubber lease covering the property so mortgaged was assigned to Lincoln National as further security for the mortgage. There was one difference. Elkhart joined in the Concord mortgage to Lincoln National as mortgagor and subject to the mortgage liability already covered in its prior mortgage also mortgaged its property to Lincoln National as security for the payment of Concord's mortgage liability.

37 T.C. 919">*931 It was the testimony of Haines that at the time of incorporating Concord he was aware that Concord would under the statute have a surtax exemption separate and apart from that of Elkhart, although it was his further testimony that even if there had1962 U.S. Tax Ct. LEXIS 195">*223 been no tax advantage, he would have organized the additional corporation in any event. The respondent has determined that the motivation for the creation of Concord and for making it the owner of a portion of the completed warehouse facility was to avoid Federal income tax by securing the benefit of a second $ 25,000 surtax exemption. The burden of showing facts which will justify a conclusion to the contrary is on the petitioner.

The reasons advanced to show that the second surtax exemption was not the principal purpose for the organization of Concord appear to be (1) to protect one warehouse building against loss of the other if some unforeseen event should occur and (2) a desire to arrange the ownership so as to fairly and properly divide ownership interests between his children. As nearly as we are able to determine, the unforeseen event which was feared was the loss of a satisfactory tenant for one or both portions of the warehouse facility, which, on the record here, must be said to have been more imagined than real. U.S. Rubber was a solid tenant for both buildings for an indefinite time in the future, having committed itself before construction was started and Lincoln1962 U.S. Tax Ct. LEXIS 195">*224 National in providing mortgage money closely comparable to the total cost of construction rather obviously regarded its leases very highly. As for the division of the ownership interests between the Haines' five sons there is no showing as to just how the two corporations served the purpose better than one, particularly when it is noted that the interests of the two youngest sons were restricted to Concord which was not in and of itself an operable warehouse facility. As shown of record, the one purpose of apparent substance if accomplished would have been the second surtax exemption of which Haines testified he was aware. Elkhart and Concord in practical respects separately exist and operate only on paper, which in our opinion is not sufficient in the circumstances here to render section 269(a)(1) inapplicable. James Realty Company v. United States, 280 F.2d 394, affirming 176 F. Supp. 306">176 F. Supp. 306, is in material respects similar to this case. See also Commissioner v. British Motor Car Distributors, Ltd., 278 F.2d 392, reversing 31 T.C. 437">31 T.C. 437; Mill Ridge Coal Co. v. Patterson, 264 F.2d 713;1962 U.S. Tax Ct. LEXIS 195">*225 Coastal Oil Storage Co. v. Commissioner, 242 F.2d 396; and Thomas E. Snyder Sons Co. v. Commissioner, 288 F.2d 36, affirming 34 T.C. 400">34 T.C. 400, which agreed with the reversal of British Motor Car Distributors, 31 T.C. 437">31 T.C. 437.

In view of the conclusions reached, it is not necessary to consider the respondent's contention that petitioner is not entitled to the surtax exemption under section 1551 of the Code.

Decision will be entered under Rule 50.