25 T.C. 1067">*1067 Respondent 1956 U.S. Tax Ct. LEXIS 265">*266 determined deficiencies of $ 19,640.14 and $ 69,869.41 in petitioners' income taxes for the respective calendar years 1949 and 1950. By amended answer, respondent has determined additional deficiencies of $ 64,720.36 and $ 178,285.58 for the respective years in controversy. Certain issues are now conceded by petitioners. The questions to be decided are (1) whether petitioners realized compensation for services rendered to certain controlled corporations, either at the time that certain housing projects undertaken by these corporations were completed and restrictions on their stock removed, or upon disposition of the stock, or at the time of the original receipt of the stock by petitioner W. H. Weaver, to the extent of the fair market value of certain stock issued by those corporations to an employed architect but immediately transferred to Weaver; (2) whether amounts received by petitioners during the years in controversy from the redemption and other disposition of stock held in their controlled corporations are taxable to them in those years as dividends; and (3) whether, if not otherwise taxable as ordinary income, the gains from distributions in redemption and sales of their 1956 U.S. Tax Ct. LEXIS 265">*267 stock in the above corporations are taxable to them as ordinary income as gain realized upon stock in collapsible corporations.

25 T.C. 1067">*1068 FINDINGS OF FACT.

Some of the facts have been stipulated and are hereby found.

W. H. Weaver, hereafter sometimes called petitioner, and his wife, Edith H. Weaver, are citizens of the United States, residing in Greensboro, North Carolina. They filed, on a cash basis, timely joint income tax returns for the calendar years 1949 and 1950 with the collector of internal revenue for the district of North Carolina.

Petitioner has been connected with the general construction business since 1938, operating this business in both proprietorship and corporate forms. He has engaged in all types of construction including residences, apartments, and commercial, industrial, and utilities plants.

Petitioner, desiring to sponsor the construction of low-cost rental housing projects under section 608 of the National Housing Act, obtained property suitable for the location of such projects; endeavored, if necessary, to have the property zoned; and held preliminary discussions with the Federal Housing Administration, hereafter called F. H. A., to ascertain whether F. H. A. would accept 1956 U.S. Tax Ct. LEXIS 265">*268 an application to insure a loan for the construction of each project.

Between 1946 and 1949 he received insured F. H. A. commitments under section 608 of the National Housing Act for the construction of at least seven incorporated projects known as Eugene Apartments (two projects), Latham Park Manor, Lindley Park Manor, and Forest Grove Homes, all in Greensboro, North Carolina; West View Court, Salisbury, North Carolina; and Hillcrest Manor, High Point, North Carolina. Petitioner no longer has any interest in Latham Park Manor, Lindley Park Manor, Hillcrest Manor, and West View Court. In addition, petitioner had other corporations that constructed houses for rental and for sale under various other F. H. A. plans of operation, including Rosewood Park Homes, Inc., which constructed individual houses under insured commitments of F. H. A. Petitioner no longer has any interest in the latter corporation.

Petitioner has also been connected with Piedmont Homes, Inc., a corporation organized to construct individual houses for sale. This corporation has been liquidated and petitioner no longer has any interest in it.

During all years herein involved, petitioner was president of the W. H. Weaver 1956 U.S. Tax Ct. LEXIS 265">*269 Construction Company, Inc., hereafter called Weaver Construction, a corporation engaged in the general contracting business, and, with his wife and their families, owned all outstanding stock therein. Weaver Construction constructed low-cost housing projects under agreements with Latham Park Manor, Inc., Lindley Park Manor, Inc., Hillcrest Manor, Inc., and Forest Grove Homes, Inc., hereafter sometimes called the corporations in controversy.

25 T.C. 1067">*1069 The corporations in controversy were incorporated on the following dates:

Prior to the incorporation of these companies their charters were approved by F. H. A. From their respective dates of incorporation through December 31, 1950, these corporations had officers and directors as follows:

L. B. Hauser (Mrs. Lillian B. Hauser) is an office employee of the law firm which rendered legal services in connection with the incorporation and organization of these corporations.

Each of the corporations in controversy maintained its books of account and filed its tax returns on an accrual basis. They used taxable years as follows:

During 1947 through 1950, R. J. Barbee was a duly qualified architect licensed to practice his profession under the laws of the State of North Carolina. His office address was in Greensboro. In April 1947, Barbee left the employment of F. H. A. and resumed the practice of architecture. He was registered with F. H. A. as the architect for the four projects undertaken by the corporations in controversy. Prior 25 T.C. 1067">*1070 to his performance of any services in connection with these projects, he and petitioner agreed upon the fee Barbee was to receive on each project. With respect to each project the cash amount to be received by Barbee was as 1956 U.S. Tax Ct. LEXIS 265">*271 follows:

The agreement in each instance was made prior to the filing with F. H. A., by the corporations in controversy, of the application for mortgage insurance. These applications and the project analyses, prepared by F. H. A. with respect to each project before the commencement of construction and determinative of the maximum insurable mortgage, contained the following amounts for architect's fees:

According to the Standard Form of Agreement between owner and architect executed by petitioner, as president of each corporation in controversy, and Barbee, the stated consideration to be paid Barbee for his services in connection with each project was as follows:

The stated par value of each share of class B common stock of each corporation was $ 100.

With respect to the stock, referred to in the Standard Form of Agreement and purportedly to be issued to Barbee for 1956 U.S. Tax Ct. LEXIS 265">*272 services rendered, there was a pre-existing agreement that the stock was to be issued in the name of Barbee and was to be endorsed by Barbee and immediately turned over to petitioner in exchange for cash in an amount equal to the difference between the cash consideration originally agreed to by Barbee and the cash consideration stated in the Standard Form of Agreement.

Barbee received the following cash amounts from the corporations for architectural services:

25 T.C. 1067">*1071 At or about the time of the incorporation of each project these corporations issued stock certificates in Barbee's name for the number of shares stated in the Standard Form of Agreement. Pursuant to the pre-existing agreement described above, Barbee endorsed the certificates to petitioner. Barbee had possession of these stock certificates only for the time required to affix his signature. At the time he endorsed the stock certificates indicated he received the following amounts in cash from petitioner, pursuant to the pre-existing agreement:

At about the same 1956 U.S. Tax Ct. LEXIS 265">*273 time, these stock certificates were surrendered to the respective corporations which issued stock certificates to petitioner for the identical number of shares surrendered. The class B common stock of the corporations in controversy originally issued in the name of Barbee and subsequently reissued to petitioner was compensation to petitioner for services rendered. The fair market value of each share of class B common stock when received by petitioner was not less than $ 100.

The issuance of stock in payment for architect's services was a normal practice and procedure in connection with F. H. A. projects under section 608 of the Federal Housing Act. Barbee performed architect's services in connection with the four projects handled by the corporations in controversy.

According to their certificates of incorporation, some of the purposes for which each of the corporations in controversy was formed are to provide housing for rent or sale, to improve and operate real estate, and to obtain a contract of mortgage insurance from F. H. A., with the further provision that the corporation shall engage in no business other than the construction and operation of a rental housing project as long 1956 U.S. Tax Ct. LEXIS 265">*274 as its property is encumbered by a mortgage insured by F. H. A.

At or about the time of their respective incorporations, the corporations in controversy issued capital stock as follows:

25 T.C. 1067">*1072 In exchange for the 1,000 shares of class B common stock issued to him, petitioner conveyed to the corporation a tract of land located in Guilford County, North Carolina. Petitioner's adjusted basis in this land was $ 17,932.03. This land upon which the project was later constructed, had been purchased by him on or about March 11, 1947, pursuant to his offer to purchase, made January 11, 1947, and an option which he had held for approximately 2 months previously. On August 5, 1947, while petitioner was the sole owner of the land and before it was conveyed to the corporation, he caused it to be zoned for apartment houses. At the time it was conveyed to the corporation, F. H. A. appraised it at $ 100,000, 1956 U.S. Tax Ct. LEXIS 265">*275 taking into consideration the designated off-site improvements. By "off-site" improvements is meant all improvements required to be made that are not within the boundary lines of a project. They include the price of the land and any improvements, such as streets, utilities, curbs and gutters, which make up a part of the estimated cost of replacement of the property.

Petitioner paid $ 20,000 in cash for the 200 shares of class B common stock issued to him. In exchange for the 200 shares of class A common stock issued to him and the 100 shares of class A common stock issued to his wife, he and his wife paid to the corporation $ 200 and $ 100, respectively, in cash. F. H. A. paid $ 100 in cash for the 100 shares of preferred stock issued to it.

In exchange for the 800 shares of class B common stock issued to him, petitioner conveyed to the corporation a tract of land located in Guilford County, North Carolina. Petitioner's adjusted basis in this 1956 U.S. Tax Ct. LEXIS 265">*276 land was $ 16,800. This land, upon which the project was later constructed, had been purchased by him on or about the last day of February 1949, pursuant to an option he had acquired in September 1948. This land was zoned for apartments on December 9, 1948.

In exchange for the 215 shares of class B common stock and the 500 shares of class A common stock issued to petitioner, he paid to the corporation $ 21,500 and $ 500, respectively, in cash. F. H. A. paid $ 100 in cash for the 100 shares of preferred stock issued to it. 25 T.C. 1067">*1073

In exchange for 285 shares of the class B common stock issued to him, petitioner conveyed to the corporation a tract of land located in Guilford County, North Carolina. Petitioner's adjusted basis in this land was $ 18,800. This land, upon which the project was later constructed, had been purchased by him, pursuant to an option acquired by assignment on February 18, 1949. In exchange for the remaining 90 shares of class B common stock 1956 U.S. Tax Ct. LEXIS 265">*277 and the 400 shares of class A common stock issued to him and for the 100 shares of class A common stock issued to his wife, petitioner and his wife paid to the corporation $ 9,000, $ 400, and $ 100, respectively, in cash. F. H. A. paid $ 100 in cash for the 100 shares of preferred stock issued to it.

In exchange for 1,000 shares of class B common stock issued to him, petitioner conveyed to the corporation a tract of land located in Guilford County, North Carolina. Petitioner's adjusted basis in this land was $ 25,000. In exchange for the remaining 200 shares of class B common stock and the 500 shares of class A common stock issued to him, petitioner paid $ 20,000 and $ 500, respectively. F. H. A. paid $ 100 in cash for the 100 shares of preferred stock issued to it.

On 1956 U.S. Tax Ct. LEXIS 265">*278 each of the following dates, prior to the incorporations but after consultations with F. H. A., petitioner submitted applications for mortgage insurance in the following amounts on behalf of each corporation:

25 T.C. 1067">*1074 The applications were accompanied by site information, a topographical survey of the site, preliminary drawings, and outline specifications showing a comprehensive delineation of the project design, planning, materials, construction, and sufficient detail for the preparation of an accurate cost estimate.

In the application filed on behalf of Latham Park petitioner stated his equity in the proposed project to be $ 130,755, consisting of land valued at $ 25,000, cash of $ 4,930, and other equity of $ 100,825, composed of builder's fee of $ 49,183 and architect's fee of $ 51,642. The value of the land, including the contemplated off-site improvements, was stated to be $ 125,000. Petitioner proposed to furnish his personal warranty to assure completion of the project construction. In the project 1956 U.S. Tax Ct. LEXIS 265">*279 analysis prepared by F. H. A. the fair market value of the land, including contemplated off-site improvements, was stated to be $ 100,000.

In the application filed on behalf of Lindley Park petitioner stated his equity in the proposed project to be $ 168,437, consisting of land valued at $ 135,000, cash of $ 1,000, and other undescribed equity of $ 32,437. Petitioner's stated equity in the land was equal to the estimated value of the land including contemplated off-site improvements. To assure completion of the project construction petitioner proposed, in this application, to furnish personal indemnity. In the project analysis prepared by F. H. A. the fair market value of the land, including contemplated off-site improvements, was stated to be $ 80,000.

In the application filed on behalf of Hillcrest petitioner stated his equity in the proposed project to be $ 71,681, consisting of land valued at $ 50,000, cash of $ 1,000, and other undescribed equity of $ 20,681. Petitioner's stated equity in the land was equal to the estimated value of the land including contemplated off-site improvements. In the project analysis prepared by F. H. A. the fair market value of the land, including 1956 U.S. Tax Ct. LEXIS 265">*280 contemplated off-site improvements, was stated to be $ 28,500.

In the application filed on behalf of Forest Grove petitioner stated his equity in the proposed project to be $ 152,225, consisting of land valued at $ 100,000, cash of $ 1,500, and other undescribed equity of $ 50,725. Petitioner's stated equity in the land was equal to the estimated value of the land, including contemplated off-site improvements. Petitioner proposed to furnish his personal indemnity to assure completion of the project construction. In the project analysis prepared by F. H. A. the fair market value of the land, including contemplated off-site improvements, was stated to be $ 100,000.

The cost of the estimated off-site improvements was stated in each of the project analyses under "Additional Requirements." To guarantee 25 T.C. 1067">*1075 1956 U.S. Tax Ct. LEXIS 265">*281 that the off-site improvements would be completed, it was required, at the time the F. H. A. commitment was made, that an Owner's Protective Bond be furnished. With respect to each corporation in controversy, except Hillcrest, this bond was furnished by Weaver Construction, as principal, pursuant to contracts for the construction of these improvements executed with petitioner as follows:

With respect to Hillcrest, the cost of estimated off-site improvements was stated to be $ 761. To guarantee that the off-site improvements would be completed, an escrow deposit was furnished on May 1, 1949, by petitioner as principal stockholder.

The F. H. A. project analyses estimated replacement cost of the proposed housing projects for a typical builder, rather than for the most or the least efficient builder.

F. H. A. commitments were made, in accordance with the amounts contained in the project analyses, and each of the corporations in controversy executed a building loan agreement providing for a mortgage loan to the extent 1956 U.S. Tax Ct. LEXIS 265">*282 of the commitment, as follows:

Petitioner was paid a premium in excess of $ 25,000 for the placing of the Latham Park loan.

On the respective dates of the building loan agreements, Weaver Construction entered into lump-sum construction contracts with each of the corporations in controversy, providing that Weaver Construction would construct the projects in accordance with the drawings and specifications for the following contract prices, such contract prices being identical to the sum of the estimates in the project analyses for improvements to land (within property lines) and structures:

25 T.C. 1067">*1076 Hillcrest did not pay any amount in addition to the contract price with respect to the required off-site improvements in the amount of $ 761. Weaver Construction received no amount in addition to the contract price for the 1956 U.S. Tax Ct. LEXIS 265">*283 construction of the off-site improvements with respect to the other three corporations. The corporations made expenditures in the following amounts out of the proceeds of the guaranteed loan, in addition to the construction costs set forth in contracts with Weaver Construction:

The commitments for insurance on each of the projects provided that the loans should bear interest at 4 per cent and that, calculated from the date of the mortgage, amortization should commence not later than the first day of the eighteenth month, as to Latham Park and Lindley Park, and of the twelfth month as to Hillcrest and Forest Grove. The first payment on the mortgage principal was made by Latham Park on June 1, 1949, by Lindley Park on October 1, 1950, by Hillcrest on May 1, 1950, and by Forest Grove on June 1, 1950.

The construction of each of the projects commenced shortly after the contracts were signed, and was completed in less than the time required by F. H. A. Units in the project were first rented about August 1, 1948, by Latham Park; August 1, 1949, by Lindley Park; September 1, 1956 U.S. Tax Ct. LEXIS 265">*284 1949, by Hillcrest; and October 1, 1949, by Forest Grove.

A request for final endorsement of a credit instrument was submitted to F. H. A. by each of the corporations. Each request reported that the project was complete with the exception of minor items of construction which were covered by escrow agreements. The requests were submitted and final endorsements occurred on the following dates:

F. H. A. regards a project as being completed at the time of the final endorsement of the credit instrument, but the rental housing projects developed and owned by the corporations in controversy were completed physically not later than December 29, 1948, by Latham Park; December 13, 1949, by Lindley Park; December 7, 1949, by Hillcrest; and January 10, 1950, by Forest Grove.

25 T.C. 1067">*1077 The certificates of incorporation of each of the corporations in controversy provide in part that the class B common 1956 U.S. Tax Ct. LEXIS 265">*285 stock shall not be retired until after the completion of the improvements on the property of the corporation in accordance with the terms of the building loan agreement between the corporation and the lending institution, nor before the final endorsement for mortgage insurance by F. H. A. of the credit instrument given to the lending institution.

The minutes of a special meeting of directors and stockholders of Latham Park, dated June 2, 1949, read in part as follows:

A review of the financial condition of the corporation revealed that the corporation had completed the building of the apartment units on Hill Street and Latham Road in the City of Greensboro; that out of the proceeds of the loan upon said apartments the corporation would have in its hands unexpended One Hundred Fifty Thousand Dollars at least; that the corporation would, in addition to the sum of $ 150,000 have funds in its hands on June 30, 1949, for the payment of all building expenses, taxes, assessments, fees and charges, whether due or accrued; that it would also have on hand, or would have paid, all interest and principal due or to become due within thirty days, and that it would have sufficient funds to pay, or 1956 U.S. Tax Ct. LEXIS 265">*286 would have paid, all deposits for taxes, assessments, water rates, mortgage insurance premiums and hazard insurance premiums, all as required by the terms of the mortgage executed by this corporation to Leon Lentz, Trustee, and insured by the Federal Housing Commissioner; that the corporation had established and maintained a reserve fund for replacements as called for in the Certificate of Incorporation.

It further appeared that the loan from the Wachovia Bank and Trust Company had been fully disbursed and had secured the final endorsement of the Federal Housing Administration.

The President stated that the corporation contemplated no further building operations and had no productive use of the funds in its hands; that the Class B common stock bore dividends at the rate of six per cent per annum, and that it would be to the best interest of the Class A common stockholders and of the corporation that so much of the Class B common stock would be retired at the end of the next fiscal period as the corporation had funds to retire, Whereupon, Lawrence T. Hoyle introduced the following resolution:

Be It Resolved that this corporation do retire at par One Hundred Fifty Thousand Dollars of the 1956 U.S. Tax Ct. LEXIS 265">*287 Class B common stock; that the retirement be made by retiring the lowest numbered Certificates now outstanding, retiring a part of a Certificate, if same should be necessary, and the President and Secretary of the corporation are authorized and directed to issue such new Certificates as may be necessary to properly carry out the intent of this resolution, and the Secretary of the corporation is directed to notify the holders of Class B common stock of the retirement as provided for herein, and the President of this corporation is authorized and directed to issue the checks of the corporation in an aggregate amount of $ 150,000.00 upon the surrender to him of Class B common stock Certificates in said amount, such retirement to be made on the 30th day of June, 1949.

The dividends on the class B common stock of Latham Park were noncumulative.

On or about June 30, 1949, petitioner surrendered 1,500 shares of class B common stock of Latham Park to that corporation for retirement 25 T.C. 1067">*1078 and received in exchange $ 50,000 in cash and "a credit of $ 100,000 to an accounts payable account to Latham Park." This account comprised amounts which petitioner had previously borrowed from the corporation, $ 1956 U.S. Tax Ct. LEXIS 265">*288 50,000 on April 6, 1949, $ 25,000 on May 11, 1949, and $ 25,000 on June 15, 1949. The shares so surrendered included 300 of the 480 shares of class B common stock which had been issued originally in the name of Barbee and subsequently transferred to petitioner. On their tax return for 1949 petitioners reported a long-term capital gain from this transaction and reported the receipt of $ 150,000 less their basis in the stock.

On or about February 28, 1950, petitioner sold, for $ 18,000, 180 shares of Latham Park class B common stock, these shares being the balance of those issued originally in the name of Barbee and subsequently transferred to petitioner, to certain individuals who were not related to or associated with petitioner. At the same time petitioners sold their total holdings, which consisted of 300 shares, of Latham Park class A common stock to the same individuals for $ 62,000. After the disposition of these shares, petitioners no longer had any interest in Latham Park. On their tax return for 1950 petitioners disclosed a long-term capital gain from this transaction and reported the receipt of $ 80,000 less their basis in the stock.

The net income of Latham Park, for its 1956 U.S. Tax Ct. LEXIS 265">*289 fiscal year ended June 30, 1949, was $ 24,103.85 before deduction of a net operating loss carryover of $ 8,512.78. Its Federal income tax liability, based upon a taxable net income of $ 15,591.07, was $ 3,485.94.

Except for the dates and other details, minutes of a joint meeting of stockholders and directors of Lindley Park, dated November 30, 1950, were similar to those above set forth for Latham Park, and authorized the retirement of all of the class B common stock.

On or about December 31, 1950, petitioner surrendered 1,615 shares of class B common stock of Lindley Park to that corporation for retirement and received in exchange $ 161,500 in cash. The shares so surrendered included the 600 shares of class B common stock which had been issued originally in the name of Barbee and subsequently transferred to petitioner. On their tax return for 1950 petitioners reported a long-term capital gain from this transaction and reported the receipt of $ 161,500 less their basis in the stock.

During 1951 and subsequent to the period in controversy, petitioner disposed of his entire holdings of 500 shares of Lindley Park class A common stock to certain individuals, who were not related to or associated 1956 U.S. Tax Ct. LEXIS 265">*290 with him, for $ 103,500. After the disposition of these shares, petitioner no longer had any interest in Lindley Park.

At the annual meeting of stockholders of Hillcrest, on January 9, 1950, a meeting was set for March 1, 1950, to consider the retirement 25 T.C. 1067">*1079 of class B common stock before the close of the fiscal year, March 31, 1950. Except for the dates and other details, minutes of a special meeting of directors of Hillcrest, dated March 1, 1950, were similar to those above set forth for Latham Park, and authorized the retirement of $ 35,000 of its par value class B common stock at par.

On or about March 31, 1950, petitioner surrendered 350 shares of class B common stock of Hillcrest to that corporation for retirement and received in exchange $ 35,000 in cash. The shares so surrendered did not include any of the 250 shares of class B common stock which had been originally issued in the name of Barbee and subsequently transferred to petitioner. On their tax return for 1950 petitioners reported a long-term capital gain from this transaction and reported the receipt of $ 35,000 less their basis in the stock.

On or about May 8, 1950, petitioner sold, for $ 27,500, 275 shares of Hillcrest1956 U.S. Tax Ct. LEXIS 265">*291 class B common stock, including the 250 shares issued originally in the name of Barbee and subsequently transferred to petitioner, to certain individuals who were not related to or associated with petitioner. At the same time petitioners sold their total holdings, which consisted of 500 shares, of Hillcrest class A common stock to the same individuals for $ 7,500. After the disposition of these shares petitioner no longer had any interest in Hillcrest. On their tax return for 1950 petitioners disclosed a long-term capital gain from the above transaction and reported the receipt of $ 35,000 less their basis in the stock.

Except for the dates and other details, minutes of a joint meeting of stockholders and directors of Forest Grove, dated October 25, 1950, were similar to those above set forth for Latham Park, and authorized the retirement of all of the class B common stock.

On or about December 29, 1950, petitioner surrendered 1,780 shares of class B common stock of Forest Grove to that corporation for retirement and received in exchange $ 178,000 in cash. The shares so retired included 580 shares of class B common stock which had been issued originally in the name of Barbee and 1956 U.S. Tax Ct. LEXIS 265">*292 subsequently transferred to petitioner. On their tax return for 1950 petitioners reported a long-term capital gain from this transaction and reported the receipt of $ 178,000 less their basis in the stock.

The net income of Forest Grove, for its fiscal year ended April 30, 1951, was $ 10,286.94 before deduction of a net operating loss carryover of $ 861.95. Its Federal income tax liability for that fiscal year, based upon a taxable net income of $ 9,424.99, was $ 2,308.04.

At the time the class B common stock of the corporations in controversy was retired, none of them "had accumulated earnings and profits and profits of the taxable year in which such stock was retired," except that Latham Park had accumulated earnings, including 25 T.C. 1067">*1080 earnings of the taxable year, of $ 11,855.13 at June 30, 1949, and Forest Grove had accumulated earnings, including earnings of the taxable year, of $ 6,937.65 at April 30, 1951.

The amounts distributed to petitioner by Lindley Park and Hillcrest upon retirement of his class B common stock in 1950 were from cash accumulated by each of these corporations from the following sources: (a) Cash paid in for stock; (b) borrowed funds received by these corporations; 1956 U.S. Tax Ct. LEXIS 265">*293 (c) depreciation reserves; or (d) rentals collected from tenants. The amounts distributed to petitioner by Latham Park in 1949 and by Forest Grove in 1950 upon retirement of his class B common stock were from similar sources with the addition of earnings for the current year.

From the respective dates of their incorporation through December 31, 1950, the books and records of these corporations do not show the voting or payment of any salaries to any of their officers, including petitioner and his wife.

Upon the completion of each of the projects involved herein, the mortgagor, being in each instance the corporate owner and operator of the project, certified to F. H. A. and the mortgagee that it did not have outstanding any unpaid obligations contracted in connection with the purchase of the property, construction of the project, or the mortgage transaction except obligations which were secured by property or collateral owned by the mortgagor independently of the mortgaged property.

Petitioner did not seek a market for the stock held by him in these four corporations, but shortly after the completion of the projects he was approached on numerous occasions to sell his stock in the project 1956 U.S. Tax Ct. LEXIS 265">*294 corporations and he received numerous offers for such stock.

In his original deficiency notice respondent determined (for example):

It has been determined that Mr. Weaver realized during the taxable year income in the amount of $ 60,000, taxable to him under the provisions of section 22 (a) of the Internal Revenue Code, for services in connection with the construction of the Lindley Park Manor Apartments for Lindley Park Manor, Inc. * * * The amount of $ 60,000 has been determined by reference to the fair market value of the 600 shares of stock as of the time the services rendered by him were completed, and the project was finished and approved by the Federal Housing Commissioner, thereby removing conditions previously restricting retirement of the stock in question.

In his amended answer respondent alleged:

11. In addition to $ 60,000 received by petitioner, W. H. Weaver, in 1950 from Lindley Park Manor, Inc., upon redemption of or in exchange for stock originally issued to R. J. Barbee and subsequently transferred to petitioner, the further amount of $ 101,500.00 was received by petitioner from Lindley Park Manor, Inc., during 1950 upon redemption of or in exchange for 1,015 shares 1956 U.S. Tax Ct. LEXIS 265">*295 of Class "B" common stock of said corporation which was issued and outstanding in petitioner's 25 T.C. 1067">*1081 name, and the full amount of $ 161,500.00 so received is taxable to petitioner as ordinary income in said year. [Emphasis added.]

12. In the alternative, during 1950 petitioners realized gain of $ 122,700.00 from the redemption of or in exchange for 1,615 shares of Class "B" common stock of Lindley Park Manor, Inc., a "collapsible" corporation, and said gain is taxable to petitioners in full pursuant to the provisions of Section 117 (m) of the Internal Revenue Code of 1939 as amended. [Emphasis added.]

The italicized portions, among others, were not referred to on the deficiency notice.

Respondent determined that petitioner, in 1949, realized $ 48,000 for services rendered to Latham Park and, in 1950, realized income of $ 25,000 and $ 58,000 for services rendered to Hillcrest and Forest Grove, respectively. The facts with respect to the deficiency notice and amended answer as to these three corporations were otherwise similar in principle to those set forth with respect to Lindley Park.

OPINION.

Although the multiplex issues are distinct they are so interconnected that it is difficult to 1956 U.S. Tax Ct. LEXIS 265">*296 discuss them separately. For the sake of precision, however, an attempt will be made to do so.

1. Compensation.

Respondent has charged petitioner with income as a result of the receipt by him of stock in four controlled building corporations, of which he was promoter, and which respondent says is compensation for services. The four situations are sufficiently similar for a single discussion.

Petitioner, as promoter, hired an architect for the project. The agreement was that a comparatively small amount of cash was to be paid him, and the balance of the architect's fee ¹ shown on the cost estimate submitted to F. H. A. was paid in stock. This was immediately and by prior agreement assigned by the architect to petitioner.

On these facts respondent says, first, the stock had no fair market value when issued, but was compensation when the projects became complete; if not, petitioner realized income, not when he received the stock, but when he sold it or had it redeemed; or finally, if it was income when received it had a fair market value equal to par.

We think the stock was income to petitioner when received, and not later. See Robert Lehman, 17 T.C. 652. 1956 U.S. Tax Ct. LEXIS 265">*297 Petitioner so contends alternatively. It was presumably issued lawfully, see Washington Post Co., 10 B. T. A. 1077, and if so, under local law, Gen. Stat. of N. C., sec. 55-62, and the operative facts, including the representation 25 T.C. 1067">*1082 to F. H. A., could only have been in consideration for services. Whether they were the architect's services in the payment for which he was allowing petitioner to share for procuring the work, or whether petitioner himself can be considered as rendering services, architectural or otherwise, we need not pause to inquire. In any event the stock, when received, represented ordinary income to petitioner, as a part of the compensation paid by the corporations for services. Walter M. Priddy, 43 B. T. A. 18; Davis v. Commissioner, (C. A. 6) 81 F.2d 137.

For similar reasons we are unable to agree that the stock had no fair market value at that time. We have found that, in fact, it was worth par. All the legal and factual considerations confirm this. See, e. g., Gen. Stat. of N. C., supra. Although there were restrictions on its immediate redemption, there were none on its transfer, and these were not, in our opinion, sufficient to reduce its value in petitioner's 1956 U.S. Tax Ct. LEXIS 265">*298 hands to a nominal amount or deprive it of any fair market value. T. W. Henritze, 28 B. T. A. 1173; see Society Brand Clothes, Inc., 18 T.C. 304, 317; cf. Harold H. Kuchman, 18 T.C. 154.

The consequence of this disposition is that the stock in one of the corporations was received in a year not before us. Petitioner concedes that the stock of the other three corporations was received by petitioner in the year 1949. He contends that if taxable to petitioner as compensation for 1949 his basis for the stock upon disposition must be correspondingly increased. Respondent does not contest this proposition and admits that the stock in the three corporations would take as its basis the fair market value at which it is now to be included in ordinary income. But he urges that the stock of the one corporation received in an earlier year has no basis. Petitioner makes no contrary contention and this question is apparently not in issue. This brings us to the matter of how disposition of the stock in the years before us is to be treated.

2. Redemption of Stock.

That the transactions in question were redemptions at such time and in such manner as to be essentially the equivalent of taxable 1956 U.S. Tax Ct. LEXIS 265">*299 dividends ² would admit of little argument if the corporations had had sufficient earnings and profits. The over-all effect is the guiding 25 T.C. 1067">*1083 consideration. Flanagan v. Helvering, (C. A., D. C.) 116 F.2d 937; Boyle v. Commissioner, (C. A. 3) 187 F.2d 557, certiorari denied 342 U.S. 817">342 U.S. 817. And here there is almost no factor outside the formalities which lends a semblance of actuality to the procedure of turning in stock and receiving cash therefor.

But except for the comparatively small amount of stipulated earnings, the Gross case ³ admittedly stands as an insuperable barrier 1956 U.S. Tax Ct. LEXIS 265">*300 to the treatment of these distributions as dividends. Respondent insists that that case was an erroneous application of the law and relies, as he did there, on Commissioner v. Hirshon Trust, (C. A. 2) 213 F.2d 523, certiorari denied 348 U.S. 861">348 U.S. 861, and Commissioner v. Godley's Estate, (C. A. 3) 213 F.2d 529, certiorari denied 348 U.S. 862">348 U.S. 862. But here, as in the Gross case, he has in effect stipulated himself out of Court. Whatever possibility there might be of arguing that petitioner's exertions created earnings for the corporations represented by the excess value of the cash received from F. H. A. over the basis of its properties has been eliminated by the concession that earnings or profits did not exist beyond the stipulated figures. Availability of profits for the declaration of taxable dividends, whether or not the result of balance sheet treatment, is a subject not dealt with in General Utilities & Operating Co. v. Helvering, 296 U.S. 200">296 U.S. 200. But on these facts it can likewise not be decided here.

The critical weakness of respondent's position is perhaps best illustrated by a quotation from his brief: "Whether 1956 U.S. Tax Ct. LEXIS 265">*301 the applicable section of the Code is section 22 (a) or section 115 (a) is of no taxable consequence, since under either section the distributions are fully taxable at ordinary income rates." (Emphasis added.)

The obvious difficulty is that section 22 (a) is qualified by section 22 (e), which refers to section 115 for the method of taxing corporate distributions. ⁴ And section 115 (a) requires for a distribution to be a dividend that it be out of "earnings or profits." Absence of the latter is hence a critical consideration. Section 115 (j) becomes applicable only after it has been determined that there was a dividend. We see no basis upon which we may depart from the theory of the Gross case. And see Harry Handley Cloutier, 24 T.C. 1006.

There is a dispute between the parties as to how much was available for distribution as "earnings or profits." Essentially, petitioner insists that current earnings -- as distinguished from "accumulated earnings" -- cannot be included. But the word "dividend" ⁵1956 U.S. Tax Ct. LEXIS 265">*302 in section 25 T.C. 1067">*1084 115 (g) must reasonably be equated with the definition of that word in section 115 (a), where the inclusion of both types is explicit. This was not accidental. H. Rept. (Mar. 26, 1936), 74th Cong., 2d Sess. (1936), p. 6; S. Rept. No. 2156, 74th Cong., 2d Sess. (1936), p. 18; 1939-1 C. B. (Part 2) 689. "Equivalence" to a dividend under section 115 (g) means only that the source shall be either of those mentioned in section 115 (a). Vesper Co. v. Commissioner, (C. A. 8) 131 F.2d 200, affirming 44 B. T. A. 1274. And the reference in section 115 (g) to accumulations "after February 28, 1913" -- to borrow a phrase -- "is to re-emphasize -- though perhaps somewhat redundantly -- that distributions of earnings and profits accumulated prior to the date mentioned are excluded from * * * the statute." Vesper Co. v. Commissioner, supra, at 205.

Finally it is urged that, if not dividends, the redemptions were compensation for services. Having already dealth with that alternative under 1, supra, we need discuss it no further than to say that, in our view, it was the stock, and not the cash ultimately exchanged for it, that constituted the compensation reasonably 1956 U.S. Tax Ct. LEXIS 265">*303 to be gathered from the facts in the present record. George M. Gross, supra, at 773. See Jack Benny, 25 T.C. 197.

3. "Collapsible" Corporation.

Respondent by amended answer, and not in the deficiency notice, attempts to tax the proceeds of both redemption and sales as ordinary income by invoking the provisions of section 117 (m). Since this provision ^{61956 U.S. Tax Ct. LEXIS 265">*304 1956 U.S. Tax Ct. LEXIS 265">*305 1956 U.S. Tax Ct. LEXIS 265">*306} first became effective in 1950, he makes no similar effort as to the gains realized in 1949. See Pat O'Brien, 25 T.C. 376.

25 T.C. 1067">*1085 Because the posture of the pleadings places upon respondent the burden of proving all necessary operative facts, Sheldon Tauber, 24 T.C. 179, we shall content ourselves by considering only one aspect of the application of section 117 (m). This is not a case where respondent advances a mere additional ground for sustaining a deficiency already determined. Cf., e. g., Raoul H. Fleischmann, 40 B. T. A. 672; see also Sol M. Flock, 8 T.C. 945. The item of income in controversy was not even mentioned in the original deficiency notice; and its inclusion by amended answer leads logically, and in fact, to respondent's application for increased deficiencies.

One of the several requirements of section 117 (m) is that at least 70 per cent of the gain 1956 U.S. Tax Ct. LEXIS 265">*307 realized shall be "attributable to the property so * * * constructed." Petitioner retorts that there is no proof of the origin of the gain and suggests that it may have been due to overappraisal, inclusion or increase in value of nonconstruction items, or activities prior or subsequent to construction such as rezoning or full occupancy. Respondent's only reply is "that the increase in value of the land was attributable to the construction of the apartment projects in the case of each corporation and that without such construction and off-site improvements the value of the land would never have increased to the extent that it did." (Emphasis added.)

Of these statements there is no evidence in the record. Ordinarily, it would have been incumbent upon petitioner to disprove the fact. But we cannot assume it here. There seems an implicit concession 25 T.C. 1067">*1086 by respondent that some of the gain was not attributable to the penalized source. We have no way of knowing how much was. On this record, and without considering petitioner's numerous other contentions relating to the general issue, we can only say that respondent has not, in our view, performed the requisite task of showing here that section 117 (m)1956 U.S. Tax Ct. LEXIS 265">*308 is applicable. See Thomas Wilson, 25 T.C. 1058.

4.

If the statute of limitations issue has not been abandoned, which it seems to have been, it must be decided against petitioner on authority of Ticker Publishing Co., 46 B. T. A. 399, 415; Liebes v. Commissioner, (C. A. 9) 63 F.2d 870. Once a deficiency notice, which is proper and timely, has been issued, respondent is authorized to apply for an increased deficiency "at or before the hearing or a rehearing," section 272 (e), regardless of whether in the meantime the statute may have run against the determination of an original deficiency.

Decision will be entered under Rule 50.