59 T.C. 681">*682 The Commissioner determined deficiencies in petitioners' Federal income tax for the calendar year 1965 as follows:

Concessions have been made1973 U.S. Tax Ct. LEXIS 169">*172 by petitioners Hans P. Kraus and Hanni Z. Kraus, ² leaving as the sole issue for our determination whether the proceeds from the sale of petitioners' stock in Kraus Reprint, Ltd., a Liechtenstein corporation, are taxable as dividends to the extent provided in section 1248, I. R. C. 1954, ³ or as capital gains. To resolve this issue we must determine whether Kraus Reprint, Ltd., was a controlled foreign corporation within the meaning of section 957(a).

FINDINGS OF FACT

Some of the facts have been stipulated. The stipulation of facts together with the exhibits attached thereto are incorporated herein by this reference.

Petitioners Hans P. and Hanni Z. Kraus, Hans Peter Kraus, Jr., Susan L. Kraus, Eveline D. Rauber, 1973 U.S. Tax Ct. LEXIS 169">*173 Herbert and Barbara Gstalder, and Mary Ann Mitchell, using the cash basis of accounting, filed their Federal income tax returns for the calendar year 1965 with the district director of internal revenue at New York, N.Y. At the time of the filing of the petitions herein, the petitioners' legal residences were as follows: 59 T.C. 681">*683

In some cases, the spouse of one or more of the petitioners is a petitioner herein solely by reason of having filed a joint Federal income tax return.

Kraus Reprint, Ltd. (hereinafter KRL), is a corporation organized under the laws of Liechtenstein. It was originally organized in April 1962 as Scientific Periodicals Enterprises, Ltd. (hereinafter referred to as Scientific Periodicals), by E.V.D. Wight (hereinafter referred to as Wight), a British citizen and resident of Liechtenstein. Its capital consisted of 100,000 Swiss Francs (hereinafter referred to as Sw Fr), which was divided into 100 common shares, 1973 U.S. Tax Ct. LEXIS 169">*174 with a par value of Sw Fr 1,000 each, all of which were duly issued. At all times relevant herein the average exchange rate was Sw Fr 4.31 to 1 U.S. dollar. The board of directors were Wight, chairman of the board, Chase C. Achard, and Hans-Ranier Wohlwend.

On or before October 31, 1962, the stock of Scientific Periodicals was acquired by Hans and Hanni Kraus on behalf of themselves and their children, all of whom constitute the petitioners herein. On November 9, 1962, the corporate name was changed to Kraus Reprint, Ltd.

At the extraordinary general meeting of KRL, held on December 12, 1962, the authorized capital was increased to Sw Fr 200,000 represented by 1,000 common shares, in bearer form, each with a par value of Sw Fr 100, and 100 registered 8-percent cumulative preferred shares, each with a par value of Sw Fr 1,000. Ten common shares were entitled to one vote and each preferred share was entitled to one vote. At the same meeting, the articles of incorporation were amended in pertinent part as follows:

Art. 4a. The Management shall keep a Share Register of the owners of registered shares, in which the shareholders shall be listed by name and domicile or by company style1973 U.S. Tax Ct. LEXIS 169">*175 and domicile, respectively. In relation to the Corporation there shall be regarded as shareholder with respect to registered shares those who are recorded in the Share Register. Registration shall be effected on the basis of a certification of effected transfer of the share or, in cases of inheritance, upon proof of inheritance, and in cases of dissolutions of corporations upon submission of proof concerning the legal successor. Registration in the Share Register shall be mentioned on the stock certificate. Transfer of registered shares is permitted only with the approval of the Board of Directors. Such approval may be denied on the basis of important reasons.

59 T.C. 681">*684 Upon acquisition pursuant to inheritance, matrimonial regime, execution or bankruptcy, the Board of Directors may deny registration only if the Corporation (pursuant to Art. 306 PGR) or shareholders declare themselves ready to acquire the shares at their real value at the time the application for registration is made. The shareholders are entitled to such acquisitions in proportion to their holdings.

Art. 4b. The preference shares are registered by name and provide for a preferential dividend of 8% per annum. 1973 U.S. Tax Ct. LEXIS 169">*176 Before any dividend is declared on the regular shares, there must be paid out each year the said preference dividend, namely within two months after the end of the fiscal year. The claim to the preferred dividend is cumulative, preferred dividends not paid out in full must therefore be paid in the following years, before any dividend on the regular shares is declared. So long as the Corporation shall have preferred shares outstanding, open reserves of the Corporation shall be maintained with at least the amount of the then outstanding par value of the preferred capital.

The preferred shares may be repaid by the Corporation to the preferred shareholders recorded in the Share Register after not less than three months' notice by the Corporation.

The shareholders shall have a claim to the par value of the preferred shares plus any past due and current dividends to the day of redemption.

In the event of the liquidation of the Corporation, the preferred shareholders shall have these same rights, namely before the further liquidation proceeds may be paid out to the ordinary stockholders.

Art. 9. The General Meeting shall be regarded as having a quorum when 51% of all the shares are represented. 1973 U.S. Tax Ct. LEXIS 169">*177 Resolutions of the General Meeting shall be passed by simple majority of the shares voting.

Art. 10. For resolutions concerning the amendments of the articles of incorporation, expansion or restriction of the aims of the business, dissolution or merger of the Corporation with another enterprise, as well as for the liquidation of the Corporation, it shall also be required that 51% of all the shares be represented. If the quorum as stated in Art. 9 is not attained, the Board of Directors may convene another General Meeting not earlier than 14 days after this meeting, at which meeting resolutions such as mentioned in this article may also be adopted if only one third of all the shares is represented, provided that among this one third there shall be present or represented at least one regular share and one preferred share.

The petitioners continued to hold all of KRL's common stock and were at all relevant times U.S. shareholders within the meaning of section 951(b).

On or about December 12, 1962, the newly created preferred shares were acquired by subscription from KRL at their par value by the following persons in the amounts shown:

1973 U.S. Tax Ct. LEXIS 169">*178 59 T.C. 681">*685 The foregoing shares were represented by stock certificates registered in the name of the respective owners.

Emka Foundation (hereinafter referred to as Emka), was organized in Liechtenstein, as a stiftung, in 1947. A stiftung is a creation of the laws of Liechtenstein or Switzerland, resembling a trust, but not limited to specific lives in being. A stiftung can own property and is controlled by an administrator (known as a stiftungerat) whose powers and duties are comparable to a trustee.

Emka was organized by Dr. Alfred Kolb (hereinafter Kolb), a Swiss attorney, pursuant to the direction of certain of his clients. The record does not indicate who were the beneficiaries of Emka. The law of Switzerland prohibits the revealing of such names. Kolb was the legal representative or attorney for Emka. He also performed legal services for other companies owned by petitioner Hans P. Kraus.

Wight, a banker by profession, was the administrator of Emka during all relevant years herein. He was the chief executive officer of KRL from its formation through July 1965, as well as other Liechtenstein corporations owned by Hans and Hanni Kraus. Wight, as administrator, was authorized1973 U.S. Tax Ct. LEXIS 169">*179 to attend the stockholders meetings of KRL and to vote any stock owned by Emka.

Kolb was approached by Maxwell Fields (hereinafter referred to as Fields), Hans P. Kraus' accountant, about the availability of certain number of preferred shares in KRL. Kolb caused Emka to purchase its shares because the 8-percent dividend rate was far in excess of State bonds which were 3 1/2 percent.

Julia Zeller de Mozer was a client of Kolb. On or about October 2, 1963, she sold her shares of KRL preferred stock, at par value, to Securities Administration & Trading Co. Establishment (hereinafter SAT). SAT was organized as an "anstalt" under the laws of Liechtenstein sometime prior to 1962. An anstalt is a corporation which may not have its capital owned by more than one individual, similar to a one-man corporation. The entire beneficial interest in SAT was owned by Mrs. Carrie E. Wight (hereinafter Mrs. Wight), a British citizen residing in Liechtenstein and wife of Wight. SAT was operated by a managing director, Chase Archard, and other directors were Kolb and Mrs. Wight. The decision to purchase the aforementioned KRL preferred stock was made by Wight.

E. V. D. Wight, Jr., and Herbert Kingsbury1973 U.S. Tax Ct. LEXIS 169">*180 Wight are the children of Wight and Mrs. Wight. Both were British citizens and residents of Liechtenstein, and during the relevant years were minors. Under Liechtenstein law, a minor's father may represent his child at stockholders meetings and vote his child's stock.

Jacques Bloch is a citizen and resident of Switzerland. His family has been close friends of Hans P. Kraus for the past 40 years. During 59 T.C. 681">*686 the relevant years Jacques Bloch was the chief executive officer of Thiele & Co., A. G., and Braunschweig & Cie. Thiele & Co., A. G., is a corporation organized under the laws of Switzerland, whose stock is held equally by Jacques Bloch's father and by Braunschweig & Cie. Braunschweig & Cie is a Swiss partnership owned by Jacques Bloch's father and uncle. Hans P. Kraus was instrumental in getting Jacques Bloch to purchase preferred shares in KRL.

Kurt Winter is a citizen of the United States. He is a first cousin of Hanni Kraus and a friend of Hans Kraus. Winter was approached by Fields about the purchase of KRL preferred, along with other available stock in Kraus-owned corporations.

As of December 12, 1962, the board of directors of KRL were Wight, Wohlwend, and 1973 U.S. Tax Ct. LEXIS 169">*181 Achard. On January 9, 1963, petitioner Mary Ann Mitchell (formerly Kraus) was elected a director, and on January 29, 1963, Wohlwend resigned. On August 19, 1963, Wight, Achard, and Mary Ann Kraus, were reelected as directors and Hans P. Kraus, and Prince Heinrich of Liechtenstein were elected to the board of directors, all for 1-year terms. ⁴ At the meeting of July 17, 1964, all the above were reelected for additional 1-year terms.

The minutes of the meeting held on July 17, 1964, reflected the following:

As to Item 4. The chairman points out that the issuance of preferred stocks has increased the number of shareholders considerably and that the single publication of Summonses, invitations and announcements in the "Liechtensteiner Vaterland" is not sufficient in order to make sure that all stockholders receive the necessary information in connection with the development of the corporation. The Board of Directors therefore1973 U.S. Tax Ct. LEXIS 169">*182 motions the change of Art. 5 of the Articles of Incorporation as follows:

5. All summonses, invitations and announcements of the Corporation to the holders of common stock are done by registered mail to them or by notification through the "Liechtensteiner Vaterland".

All summonses, invitations and announcements of the corporation to the holders of preferred stocks are done by registered letter to the address of the holders of preferred stock, last registered in the stockbook (§ 4 a)

The chairman motions the approval of this new wording for article 5 of the Articles of Incorporation. This motion is approved unanimously.

The articles of incorporation were further amended as follows:

Article 10. For resolutions on changes of Articles of Incorporation, change corporative capital, repayment of preferred shares pursuant to article 4b Para 2, broadening or narrowing the scope of business, dissolution or merger of the corporation with another enterprise, and liquidation of the corporation, it shall also be required that 51% of all shares be represented. Should the quorum mentioned in article 9 not be reached, the Board of Directors may, at the 59 T.C. 681">*687 earliest after 14 days have1973 U.S. Tax Ct. LEXIS 169">*183 elapsed since this meeting, call a new stockholders meeting at which the resolutions mentioned in this Paragraph may be adopted even if only one-third of all shares be represented, provided, however, that at least one common share and one registered share shall be present or represented in such one-third.

The provisions of the preceding paragraph shall not apply to resolutions of the stockholders meeting concerning repayment of preferred shares pursuant to Art. 4b, Para 2.

On April 1, 1965, all the preferred shares were sold to Bank Und Finanz Institut, A. G. (hereinafter Bank Und Finanz), at their par value. The transfer of these shares was approved by the board of directors of KRL. The record does not indicate where Bank Und Finanz was organized, nor is there any evidence concerning the nationality or citizenship of any of its stockholders.

Following the issuance of the preferred stock, the stockholders of KRL met on the following dates with the indicated percentage of represented stockholders:

1973 U.S. Tax Ct. LEXIS 169">*184 The minutes of the meetings of August 19, 1963, and July 17, 1964, do not indicate whether the shareholders appeared in person or by proxy. At the meeting of December 7, 1964, Wight represented the 45 shares held by Emka Foundation and the 18 shares held by his sons. Dr. Alois Ritter, counsel to KRL and other Kraus corporations in Liechtenstein, represented the 18 preferred shares owned by Kurt Winter. Fields served as proxy for all the common shares.

The April 6, 1965, meeting of KRL found Hans P. Gerber, a director of Bank Und Finanz, representing its 73 shares. Jacques Bloch represented 9 shares, and Fields represented 18 owned by Kurt Winter. ⁵ The common shareholders were represented by Hans P. Kraus.

1973 U.S. Tax Ct. LEXIS 169">*185 At the July 2, 1965, meeting, Bank Und Finanz authorized Otto Zucker and Harold Manheim to represent and vote its preferred shares. Zucker and Manheim were partners in the New York law firm of Wachtell, Manheim & Grouf, and during the years 1962 through 1965 were Hans P. Kraus' regular attorneys. At this meeting the charter of KRL was amended to authorize, among other things, a split of the 100 59 T.C. 681">*688 preferred shares into 1,000 preferred shares at a par value of SwFr 100.

The petitioners agreed, on July 16, 1965, to sell 51 percent of their common stock in KRL, as well as 51 percent of their stock in Kraus Reprint Corp., a domestic corporation, to Thomson International Corp., Ltd. (hereinafter Thomson), a corporation organized under the laws of Ontario. The agreement states further, in pertinent part, as follows:

Section 5. Purchase of Preferred Stock of Kraus Reprint Limited.

5.1 Mr. Kraus and Mrs. Kraus agree that:

(a) They will cause the owner of all of the outstanding preferred stock of Kraus Reprint Limited to sell 51% of such stock to Thomson, concurrently with the Closing, at an aggregate price not exceeding 52,020 Swiss francs plus an amount equal to the dividends1973 U.S. Tax Ct. LEXIS 169">*186 accrued and unpaid thereon at the rate of 8% per annum from November 30, 1964 to the Closing Date; and

(b) They will buy the remaining 49% of such preferred stock from such owner at the same time and at the same price and terms as Thomson.

5.2 Mr. Kraus and Mrs. Kraus jointly and severally represent and warrant to Thomson that:

(a) All of such preferred stock is validly issued, fully paid and non-assessable and has not been called for redemption;

(b) Upon payment for shares of such preferred stock at the Closing Thomson will acquire good and valid title thereto, free and clear of any liens, claims, options, charges or encumbrances; and

(c) The changes in ownership of such preferred stock contemplated by this Section 5 will not violate any provision of the statutes of Kraus Reprint Limited or any provision of, or result in the acceleration of any obligation or the loss of any rights under, any mortgage, lien, lease, agreement, instrument, order, arbitration award, judgment or decree to which such Corporation is a party or by which it is bound and will not violate or conflict with any other restriction of any kind or character to which such Corporation is subject or violate any agreement1973 U.S. Tax Ct. LEXIS 169">*187 or restriction of any kind to which such Corporation or any of the Shareholders or the owner of such preferred stock is a party or by which it or any of them is bound.

5.3 Thomson agrees to buy 51% of the outstanding preferred stock of Kraus Reprint Limited from the owner thereof, concurrently with the Closing, at the price specified in Section 5.1, subject to fulfillment of the conditions of closing specified in Section 8.

5.4 Mr. Kraus and Mrs. Kraus jointly and severally agree to indemnify Thomson against and hold it harmless from all damages, losses and expenses arising out of any breach of warranty or inaccurate or erroneous representation made in Section 5.2.

5.5 The provisions of this Section 5 are not intended for the benefit of and shall not be enforceable by or on behalf of any person other than the parties hereto and their respective successors and assigns.

The petitioners sold such portion of their common stock on July 30, 1965, realizing a gain which was reported on their respective tax returns as follows: 59 T.C. 681">*689

1973 U.S. Tax Ct. LEXIS 169">*188 The earnings and profits of KRL accumulated between December 31, 1962, and July 30, 1965, attributable to the common shares sold by petitioners were as follows:

Also on July 30, 1965, Bank Und Finanz sold 510 preferred shares of KRL to Thomson for a total price of Sw Fr 54,739.83 or approximately $ 12,700. On the same day, Bank Und Finanz sold the remaining preferred shares in KRL to Hans P. and Hanni Z. Kraus, and the parties executed the following agreement.

Agreement for the Purchase and Sale of Preferred Stock

BANK UND FINANZ-INSTITUT AG. hereby agrees to sell to HANS P. KRAUS and to HANNI KRAUS and HANS P. KRAUS and HANNI KRAUS each hereby agrees to purchase, on the date hereof, 245 shares of the preferred stock of KRAUS REPRINT LIMITED, a Liechtenstein corporation, each for a total price of 26,317.12 Swiss francs.

HANS P. KRAUS agrees to reimburse BANK UND FINANZ-INSTITUT1973 U.S. Tax Ct. LEXIS 169">*189 AG. for all stock transfer taxes levied in connection with this sale and the sale of even date to THOMSON INTERNATIONAL CORPORATION LIMITED.

Dated: July 30, 1965

BANK UND FINANZ-INSTITUT AG

By: (Signed) Harold Manheim

Harold Manheim, Attorney-in-Fact

(Signed) Hans P. Kraus

Hans P. Kraus

(Signed) Hanni Kraus

Hanni Kraus

The consideration paid by Hans P. and Hanni Kraus to Bank Und Finanz amounted to approximately $ 12,210.

KRL's financial picture was as follows: 59 T.C. 681">*690

Hans P. Kraus has engaged directly and indirectly in the periodical reprint and rare books business for many years. During 1962 and until 1965, he and his family owned substantial interests in the stock of the following corporations:

1973 U.S. Tax Ct. LEXIS 169">*190 Hans and Hanni were also equal partners in H. P. Kraus, a U.S. partnership engaged in the same business as Rare Books, Ltd.

At the end of 1962, or the beginning of 1963, the Kraus-owned Liechtenstein corporations were recapitalized by the issuance of voting preferred stock. Said voting preferred stock was subscribed to by some of the preferred shareholders of KRL, including Kurt Winter, Emka, SAT, E.V.D. Wight, Jr., and Herbert Kingsbury Wight.

Although Emka, SAT, E.V.D. Wight, Jr., and Herbert Kingsbury Wight sold their shares of KRL preferred stock, they did not sell the preferred stock of other Kraus-owned corporations.

59 T.C. 681">*691 Hans P. Kraus was in the courtroom at the time of trial in the instant case, but was not called to testify. No employee, officer, or director of KRL during 1962 through 1965, or of Bank Und Finanz, was called to testify. Wight died on May 10, 1970, and Maxwell Fields died sometime in 1970.

OPINION

Petitioners owned 100 percent of KRL, a foreign corporation organized under the laws of Liechtenstein. On December 12, 1962, the articles of incorporation were amended to authorize the issuance of 100 registered 8-percent cumulative preferred shares, par 1973 U.S. Tax Ct. LEXIS 169">*191 value Sw Fr 1,000 each, with voting power equal to that of the common shares held by the petitioners. The preferred shares were acquired by subscription immediately thereafter. In 1965, the petitioners sold 51 percent of their common stock in KRL to Thomson, a Canadian corporation, and realized gains in the following amounts:

The sole issue for our determination is whether any part of the gain realized must be treated as a dividend under the provisions of section 1248.

Section 1248(a) provides:

SEC. 1248. GAIN FROM CERTAIN SALES OR EXCHANGES OF STOCK IN CERTAIN FOREIGN CORPORATIONS.

(a) General Rule. -- If --

(1) a United States person sells or exchanges stock in a foreign corporation, or if a United States person receives a distribution from a foreign corporation which, under section 302 or 331, is treated as an exchange of stock, and

(2) such person owns within the meaning of section 958(a), or is considered as owning by applying the rules of ownership1973 U.S. Tax Ct. LEXIS 169">*192 of section 958(b), 10 percent or more of the total combined voting power of all classes of stock entitled to vote of such foreign corporation at any time during the 5-year period ending on the date of the sale or exchange when such foreign corporation was a controlled foreign corporation (as defined in section 957),