10 T.C. 754">*755 The respondent determined deficiencies for the fiscal years ended August 31, 1942, 1943, and 1944, as follows:

The deficiencies resulted in part from determinations that the reasonable compensation for services rendered by the taxpayer's president was $ 15,000, $ 15,000, and $ 10,000 for the taxable years 1942, 1943, and 1944, respectively, and in part from a determination that the income of the taxpayer should be increased by $ 22,773.76 for the taxable year 1944. The two issues for decision are (1) whether the respondent erred in disallowing the amounts deducted by the petitioner in excess of those allowed as reasonable compensation under section 23 (a) (1), and (2) whether the respondent erred in allocating the net income of a sole proprietorship, known as Carlisle Miles & Co., to the petitioner corporation under section 45 of the Internal Revenue Code.

FINDINGS OF FACT.

The petitioner, Miles-Conley Co., is a corporation1948 U.S. Tax Ct. LEXIS 205">*207 organized under the laws of the State of Maryland. The returns for the periods here involved were filed with the collector of internal revenue in Baltimore, Maryland. The principal place of business of the petitioner is the Pennsylvania Produce Terminal, Baltimore, Maryland.

The sole stockholder of petitioner corporation and the proprietor of the business known as Carlisle Miles & Co. (the formation and character of which is later set out herein) was A. Carlisle Miles. Miles was born in July 1892. He sold insurance after leaving Western Maryland College in 1912. In 1914 he began his career in the produce industry by working for Miles Co. of Dubois, Pennsylvania. He bought and sold fruits and vegetables and inspected produce to see that it was in conformity with contract specifications. After one year in the United States Navy in the First World War, he traveled for a packing company. In 1920 he decided that he was ready to start in the produce business for himself. He was desirous of beginning his own business and became convinced that there was an opportunity for such a business in Baltimore, Maryland.

In 1921 Miles and five other individuals organized the "Miles-Conley 1948 U.S. Tax Ct. LEXIS 205">*208 Co., Inc." This company was incorporated and is the petitioner, hereinafter referred to as the corporation. The original capital investment was $ 10,000 and the business purpose was to act as a commission 10 T.C. 754">*756 merchant and wholesaler in the produce industry. Three of the six incorporators were to "turn in tonnage," that is, to solicit produce for purchase or consignment; two were to manage the office; and one was assigned to sales. By 1923 this arrangement proved unsatisfactory. The interests of three stockholders were purchased by the three remaining incorporators. In 1924 the capital of the corporation was increased to $ 40,000.

A. Carlisle Miles purchased the two remaining outstanding interests in the corporation in 1936. Thereafter, he conducted the business alone. He has been president of the corporation since 1922. He owns all of the shares of its capital stock, which are issued in his name, with the exception of two qualifying shares issued to members of his family. Miles and his two brothers constitute the board of directors of petitioner. Virtually all of the business solicited on behalf of the corporation is the result of the work of Miles. He personally handles1948 U.S. Tax Ct. LEXIS 205">*209 all of the corporation's carloads of produce on consignment or for the corporation's own account. Miles also acts as the general manager, in addition to handling the produce. He secures all supplies and sees that the merchandise is properly handled and accounted for. He protects shippers against claims and delays in transit and generally supervises the products entrusted to him. Miles exercises, and exercised during the taxable years, complete control over the activities of the corporation. His salary paid to him by petitioner for the three years in question was $ 24,000 each year.

The warehouse and offices of the petitioner corporation were, and are, in the Pennsylvania Produce Terminal, Baltimore, Maryland. Produce solicited from shippers or growers for purchase, or on consignment, are shipped to the Pennsylvania Produce Terminal Building and delivered to the doors of the premises rented by the corporation which front upon the railroad tracks. The produce is stored until sold and then removed by truck from the opposite side of the Terminal shed. The corporation in 1943 had two offices over the shed, the office occupied by A. Carlisle Miles and an outer office for office 1948 U.S. Tax Ct. LEXIS 205">*210 employees. The corporation during the years in question had two office employees, one of whom was in charge of the bookkeeping records. The corporation also employed two laborers. There were two salesmen who assisted Miles. Sales were made by petitioner to Government camps occasionally, and to purchasers in Baltimore, Philadelphia, Lancaster, York, Buffalo, Rochester, and New York.

The corporation was, and is, licensed as a commission merchant and/or dealer and/or broker to handle fresh fruits and vegetables in interstate and foreign commerce by the United States Government under the provisions of the Perishable Agriculture Commodities Act of 1930, and is a member of the Baltimore Fruit & Produce Association. 10 T.C. 754">*757 During the years in question the corporation was listed in the telephone directory and the Produce Reporter "Blue Book," the function of which latter is to inform the industry of the financial and moral reputation of various concerns, commission merchants, shippers, growers, jobbers, and wholesalers in the fruit and vegetable industry. The corporation had its own bank account, books and records, and credit authorization from the Pennsylvania Railroad. On occasion1948 U.S. Tax Ct. LEXIS 205">*211 the corporation made use of the Standard Inspection Service to inspect incoming produce.

By the latter part of 1943 petitioner's business in fruits had become considerably larger, and more important to it than its business in vegetables. At that time it had become the common and accepted practice for larger produce commission businesses to specialize in either fruits or vegetables, or even in certain types of fruits or vegetables. In August 1943 A. Carlisle Miles decided on behalf of petitioner and himself that the petitioner would cease soliciting business in vegetables; that he, as an individual, would organize and conduct a produce commission business specializing in the handling of vegetables; and that petitioner corporation would specialize in the handling of fruits. Accordingly, in August 1943 Miles began the business of a sole proprietorship known as Carlisle Miles & Co.

Prior to that time petitioner had in its employ two salesmen, each working in fruits and vegetables. Thereafter, one salesman concentrated in the sale of fruits and one in vegetables. The primary work of the latter was for the sole proprietorship, although he continued to be paid by the petitioner. The1948 U.S. Tax Ct. LEXIS 205">*212 petitioner, however, was reimbursed on account thereof by the proprietorship, pursuant to a formula hereinafter described, which reimbursement included all expenses on account of salesmen.

At the end of the fiscal period August 31, 1943, the name "Carlisle Miles and Co." was substituted for the name "Miles-Conley Co., Inc.," over two of the corporation's four doors at the Pennsylvania Produce Terminal and placed beneath the corporation's name on the outer office door. A separate and complete set of books and records to reflect the business transactions of the new proprietorship was given to the office employee of petitioner who kept the accounting records and thereafter all of the transactions of the proprietorship incident to the purchase, consignment, and sale of fruits were recorded separately from those of petitioner. No official action in regard to these matters was taken by the officers or directors of petitioner corporation.

A. Carlisle Miles opened an account with the First National Bank of Baltimore under the name of "Carlisle Miles and Co.," with a deposit of $ 10,000 from his individual account on August 16, 1943. This account remained active during the taxable years. 1948 U.S. Tax Ct. LEXIS 205">*213 This deposit 10 T.C. 754">*758 and considerable sums of money borrowed from the bank by A. Carlisle Miles constituted the only source of funds to the proprietorship. There was no commingling of the funds of petitioner and Carlisle Miles & Co. Nor did either make sales to the other. A. Carlisle Miles had his individual listings in the Produce Reporter changed to "Carlisle Miles and Co., A. Carlisle Miles, Proprietor." The sole proprietorship was licensed by the United States Government to handle fruits and vegetables in interstate or foreign commerce on October 8, 1943. A separate listing in the telephone book was acquired as well as a membership in the Baltimore Fruit & Produce Association, and an employer's number for Social Security.

The net income of the sole proprietorship during the period September 1, 1943, to August 31, 1944, was $ 22,773.76.

The actual operation of the business of the sole proprietorship involved purchasing and selling vegetables either on its own account or on commission, telegraphing, requesting inspection services, investigating the credit of those with whom it dealt, paying for freight and the hauling of vegetables, and billing and collecting from customers. 1948 U.S. Tax Ct. LEXIS 205">*214 All these things were done by and in the name of the sole proprietorship. It shared certain other services and facilities with petitioner, which paid for them and was later reimbursed by the proprietorship. At least twice during each 12-month period, these expenses were apportioned between two organizations. On August 31, 1944, the petitioner corporation received from the proprietorship $ 8,308.07 in payment for the latter's shares of certain expenses. These expenses included rent, fire insurance, salaries, traveling and entertaining expenses, telephone, social security taxes, cleaning and janitor service, postage, electricity, and professional fees. All other expenses of the proprietorship were paid by it direct. The payments made by it to petitioner represented the sole proprietorship's share of those expenses paid by petitioner on account of services and facilities shared by it and the proprietorship, which were based on the proportion of carload lot business done by the proprietorship to the carload lot business done by petitioner corporation. The payments made by the proprietorship to petitioner pursuant to this formula which represented the part of the expenses incident1948 U.S. Tax Ct. LEXIS 205">*215 to the shared services and facilities to be reimbursed to petitioner, amounted to approximately 3 per cent of the bills of the proprietorship which it paid directly, including all payments made from borrowed money for produce purchased. The formula for ascertaining these payments was fair to both parties.

The following schedules show the volume of business of petitioner and the sole proprietorship during the pertinent years: 10 T.C. 754">*759

The number of carloads of produce handled by petitioner and Carlisle Miles & Co., respectively, during the taxable years 1943 and 1944, was as follows:

The income tax returns of petitioner show the1948 U.S. Tax Ct. LEXIS 205">*216 following:

The following salaries were reported by Miles as paid to him:

Petitioner's balance sheet for the end of the fiscal year 1943 shows that of its total assets of $ 57,507.12, its cash amounted to $ 36,690.31 and its receivables to $ 9,398.76, with only $ 1,181.83 representing the value of depreciable capital assets.

The following are listings drawn from the1948 U.S. Tax Ct. LEXIS 205">*217 1944 publication of the Produce Reporter, known as the "Blue Book":

Miles-Conley Company, Pennsylvania Produce Terminal, trading members, commission merchants, receiver and jobber. 2000 cars of apples, oranges, potatoes, onions, southern mellons, peaches, beans, cantaloupes, cabbage, tomatoes, and sweet potatoes, with a rating of $ 50,000 XXXX.

10 T.C. 754">*760 Carlisle Miles and Company, (A Carlisle Miles, proprietor), Pennsylvania Produce Terminal. A grower, shipper, receiver and jobber of potatoes, cabbage, southern vegetables, sweet potatoes and various other vegetables, with a rating of $ 75,000 XXXX.

The Baltimore Telephone Directory contains listings as follows:

Miles-Conley Company, Incorporated, Commission Merchants, Pennsylvania Produce Terminal, Madison 3100; nights, Sundays, and holidays call John Frank, Jr., Clifton 0150.

Carlisle Miles Company, Commission Merchants, Pennsylvania Produce Terminal, Madison 3100; nights, Sundays, and holidays call Henry L. Ivenor, Broadway 2314.

A reasonable compensation for the services of petitioner's president during each of the taxable years was not in excess of the amount determined by respondent.

Petitioner's books of account clearly reflect1948 U.S. Tax Ct. LEXIS 205">*218 its income for the taxable years. The income of A. Carlisle Miles, doing business as Carlisle Miles & Co., for the taxable years is clearly reflected by his separate books of account, and no part thereof constituted income of the petitioner.

OPINION.

The first and more interesting question involved in this proceeding is whether the respondent erred in allocating to petitioner corporation all of the net income of a sole proprietorship carried on by petitioner's controlling stockholder, A. Carlisle Miles, doing business as Carlisle Miles & Co., for the taxable year ended August 31, 1944. Respondent determined that petitioner's income for the taxable year should be increased by the amount of the net income of the proprietorship under the provisions of section 45 of the Internal Revenue Code. ¹

1948 U.S. Tax Ct. LEXIS 205">*219 Respondent's principal argument offered to support the validity of this determination is that A. Carlisle Miles, who controlled petitioner corporation, and, of course, controlled his sole proprietorship, caused certain of the profits which would otherwise have been earned by the petitioner to be shifted to his individually owned business.

Petitioner contends that respondent's determination was erroneous and argues substantially as follows: That the business of the corporation and the proprietorship, though of a related nature and controlled by the same individual, were during the taxable year separately organized 10 T.C. 754">*761 and conducted, that the income of each is reflected in the books of each, and that the effect of respondent's determination is to consolidate the net incomes of two separate business organizations. Petitioner relies strongly on Ross v. Commissioner, 129 Fed. (2d) 310, and Seminole Flavor Co., 4 T.C. 1215. Briefs were filed herein prior to our decision and opinion in Buffalo Meter Co., 10 T.C. 83.

Petitioner was a "one man" corporation, engaged in a business which 1948 U.S. Tax Ct. LEXIS 205">*220 may be characterized as the commission business. The principal elements which created its income were the services of its president and sole stockholder and liquid capital in the form of cash. Its balance sheet for the end of 1943 shows that, of its total assets of $ 57,507.12, $ 36,690.31 represented cash, $ 9,398.76 represented notes and accounts receivable, and $ 8,600 represented the cash value of a life insurance policy. Only $ 1,181.83 represented the value of depreciable capital assets. Shortly prior to the taxable year petitioner's president and stockholder decided that the petitioner should cease to solicit the dealing in vegetables, and that this part of its business should be carried on by him in his individual capacity. He thereupon began business as a sole proprietor. The principal elements producing the income of the proprietorship were again the personal services of A. Carlisle Miles and cash. The cash so used was his own and not that of the petitioner. With this cash he made his own purchases of produce handled by the individual proprietorship and paid directly the greater part of its expenses. The proprietorship shared rented space with the corporation and1948 U.S. Tax Ct. LEXIS 205">*221 also shared the services of certain employees, the use of utilities, and other minor matters. The expenses of the facilities shared by the corporation and the proprietorship were prorated according to the number of carloads received by each and the proprietorship paid to petitioner the sums thus ascertained to be its share of these expenses. These prorated payments amounted to a small percentage of the total expenditures of the proprietorship.

The income of the proprietorship thus earned principally by the use of its own money, and the services of the proprietor, can not be realistically said to have been earned by the corporation, as in the cases of Forcum-James Co., 7 T.C. 1195, and R. O. H. Hill, Inc., 9 T.C. 153. The use, without consideration, of the capital assets of the corporation was not a material element in the production of the income of the proprietorship. Cf. Rasmusson v. Eddy's Steam Bakery, Inc., 57 Fed. (2d) 27. If the income purportedly that of the proprietorship had, in reality, been earned by the corporation, then it would have been taxable to the corporation by1948 U.S. Tax Ct. LEXIS 205">*222 virtue of one of the most fundamental concepts of taxation and not by virtue of section 45 of the Internal Revenue Code. The respondent does not deny that A. Carlisle Miles did operate and conduct a business. Indeed, before section 45 could be applied by respondent, it would be necessary that there exist "two or 10 T.C. 754">*762 more organizations, trades, or businesses * * * owned or controlled by the same interests."

If the income here in question represented a profit of the corporation realized not by it, but by the proprietorship as a result of a shifting of interests for the purpose of avoiding such realization for taxation, then section 45 would be applicable. See Asiatic Petroleum Co. (Delaware) Ltd., 31 B. T. A. 1152; affd., 79 Fed. (2d) 234. This is not the situation present in the instant case. Although respondent, in his brief, makes statements to the effect that Miles shifted profits of the corporation to his individually owned company, it is apparent that he does not mean that unrealized earnings of the corporation were shifted to the proprietorship for the purpose of permitting the realization of the profits1948 U.S. Tax Ct. LEXIS 205">*223 by, and their taxation to, the proprietorship. His true position is more exactly stated in the following sentence: "It thus appears that commissions which would ordinarily have been earned by the petitioner were shifted to the individually owned business of Mr. Miles."

Respondent contends that the instant case can be distinguished from Seminole Flavor Co., supra, in that the sole proprietorship of Carlisle Miles & Co. was not organized and operated for a definite business purpose. As we have pointed out, respondent does not deny that A. Carlisle Miles, a living individual, organized and operated a business under the name of Carlisle Miles & Co. with his own money and his own efforts. It is not suggested that A. Carlisle Miles, doing business as Carlisle Miles & Co., should be disregarded as a sham. While it is difficult to follow the argument on this point, it seems to be respondent's position that no business purpose of the corporation was served by reason of its relinquishment of a part of its business and its permission to its sole stockholder to conduct the business thus relinquished in his individual capacity, that it will therefore be considered1948 U.S. Tax Ct. LEXIS 205">*224 that the corporation did not relinquish any part of its business, and that when A. Carlisle Miles purported to carry on the part of the business purportedly relinquished he was doing so only as an agency or department of petitioner.

In our opinion this position does not represent a realistic appraisal of the facts. It ignores what was done and relies too much on what might have been done, or what should have been done. As we said in Seminole Flavor Co., supra, p. 1235: "Actually, the principal force behind all of the Commissioner's argument is that petitioner could as well have done all the things that the partnership did and reaped all of the earnings of the related enterprises. Since petitioner could have had the earnings, the Commissioner would make it so by exercising the authority conferred by section 45." This argument we rejected.

Here we have a "one man" corporation engaged in the business of 10 T.C. 754">*763 buying and selling, or selling on commission, fruits and vegetables. The corporation could have continued its business in fruits and vegetables. However, its controlling stockholder decided that petitioner should relinquish its active conduct1948 U.S. Tax Ct. LEXIS 205">*225 of the business relating to vegetables and that he, as an individual, should organize and carry on the vegetable business as a sole proprietor, and this was done. He carried on the vegetable business as a sole proprietor, but shared offices and expenses with the corporation. The result of this transaction was to reduce the income of the corporation, and also to reduce the amount of taxes collected by the Commissioner of Internal Revenue. However, we know of nothing in the Internal Revenue Code, and no cases have been called to our attention, which would justify a disregard of the existence of a sole proprietorship because of any lack of business purpose quoad the corporation. In the instant case we assume, arguendo, that the purpose of A. Carlisle Miles in causing the petitioner to relinquish its dealing in vegetables and in organizing and conducting the business in vegetables as a sole proprietorship was not to further the best interests of the corporation, but was to further his own best interests (including the minimizing of total taxes payable by him and his controlled corporation). We are, nevertheless, unable to conclude that these assumed facts compel us to merge1948 U.S. Tax Ct. LEXIS 205">*226 the actuality of the sole proprietorship into the fiction of the corporation for tax purposes, or to disregard A. Carlisle Miles as a separate taxable entity. This is not the case of an individual organizing a solely owned corporation which, as a fiction and a sham, may be disregarded for tax purposes. Cf. Higgins v. Smith, 308 U.S. 473">308 U.S. 473. The respondent, in this case, recognizes the corporation, but disregards the individual. Even his disregard of the individual is provisional and paradoxical. His position appears to be that the sole proprietorship is recognized for the purpose of invoking section 45 and that the reason section 45 is applicable is that, in reality, the sole proprietorship does not exist because it is not useful to the legal fiction of the corporation.

In the instant case it may be that the sole stockholder of the corporation received from the corporation something of value at the time of and by reason of the relinquishment of part of its business by the corporation. This something of value, in the nature of good will, might have been taxable to the sole stockholder in the year in which it was received as a distribution of a dividend1948 U.S. Tax Ct. LEXIS 205">*227 or a distribution in partial liquidation. Such an issue is not before us. The fact, if it be a fact, that the sole stockholder received something of value from the petitioner in 1943 which he used in the operation of a sole proprietorship in 1944 would not require or justify the taxing of the income of the proprietorship to the corporation.

The cases cited by petitioner are persuasive, but not controlling. In Seminole Flavor Co., supra, a compensation was paid to the corporation 10 T.C. 754">*764 by the stockholder-partners for the right to carry on a part of the business formerly transacted by the corporation, and we concluded that this compensation was fair and fairly arrived at. In Ross v. Commissioner, supra, the facts stated by the Circuit Court of Appeals indicate that the corporation and the partnership composed of its stockholders were formed at approximately the same time, and no part of the business of the corporation was relinquished to the stockholders.

The recent case of Buffalo Meter Co., supra, while having distinguishable facts, is, perhaps, closer to the instant case. There1948 U.S. Tax Ct. LEXIS 205">*228 the two stockholders of a corporation, organized in 1894 and engaged in the business of manufacturing and selling meters, created a partnership in 1942 for the purpose of taking over from the corporation, and carrying on, the business of manufacturing the meters. While certain of the assets of the corporation necessary for the manufacture of meters were paid for by the partnership at their inventory value, there was no payment for the business as such relinquished by the corporation, or for any item which would represent good will. There was no finding that a sound business reason (from the standpoint of the corporation) dictated the transaction. We held in that case that section 45 had no applicability. In the course of our opinion we said:

The petitioner's stockholders here were under no obligation to continue the business, either the whole or any part of it, in corporate form. They might have dissolved the corporation entirely and transferred all of its functions to the partnership. As has been said repeatedly, the tax laws do not undertake to deny taxpayers the right of free choice in the selection of the form in which they carry on business. The petitioner's stockholders1948 U.S. Tax Ct. LEXIS 205">*229 chose here to retain, in corporate form, one of the major functions of petitioner's business, the foundry, and to transfer to the partnership the manufacturing and selling division. This was in no sense an unnatural division. The foundry and manufacturing operations were not interdependent. Either might have existed independently of the other * * *.

Respondent also contends that the application of section 45 is required to accurately reflect the true income of each business because the books and records of the petitioner and the proprietorship do not reflect their true incomes in that the method of the allocation of expenses was not proper and the payments made to the corporation pursuant to the method of allocation used were inadequate. We disagree with this contention. Both the corporation and the proprietorship kept detailed and complete books and records, accurately reflecting the various items that were pertinent in ascertaining the income of each. As to a relatively insignificant item of expense, the allocable part of the rent, respondent contends that the payment made by the proprietorship should have been determined by the number of doors assigned to the proprietorship1948 U.S. Tax Ct. LEXIS 205">*230 rather than the proportionate amount of carloads handled by it. Even if we agreed with this contention, which we do not, it would hardly justify the allocation to petitioner of all of the 10 T.C. 754">*765 net income of the proprietorship. Respondent also contends that no part of the salary paid by the corporation to A. Carlisle Miles was allocated to the proprietorship. This contention is more properly to be considered under the issue next to be considered.

That issue is whether respondent erred in determining that a reasonable compensation for services rendered to petitioner by A. Carlisle Miles did not exceed $ 15,000 for each of the taxable years 1942 and 1943, and did not exceed $ 10,000 for the taxable year 1944.

On this issue we decide in favor of respondent. The proof offered by petitioner was not such as to support a conclusion that respondent erred in his determination. As to 1944, the record affirmatively supports this determination. In that year a considerable part of the efforts of Miles was devoted to the business of the proprietorship, rather than to the business of the petitioner.

It should be pointed out in this connection that there is an inconsistency in respondent's1948 U.S. Tax Ct. LEXIS 205">*231 position on the two issues here involved. Respondent has allowed to petitioner a deduction on account of compensation to Miles in 1942 and 1943 of $ 15,000. The deduction allowed in 1944 was only $ 10,000. The only reason which could justify this reduction is the fact that in 1944 Miles was devoting a considerable part of his time to the business of the proprietorship, yet the respondent included the entire net income of the proprietorship in the taxable income of the petitioner corporation without allowing as a deduction any compensation for Miles' services rendered in producing that income.

On the first issue our decision is in favor of petitioner; on the second it is in favor of respondent.

Decision will be entered under Rule 50.

Van Fossan, J., dissenting in part: I feel that the respondent's action as to salaries should be reversed.

Murdock, J., dissenting: The record justifies the full salaries paid to Miles. He was the whole show.