42 T.C. 291">*291 The Commissioner determined a deficiency in petitioners' income tax for the taxable year ended December 31, 1955, in the amount of $ 24,437.40; of this amount, $ 1,163.69 constituted an addition for negligence under section 6653(a) of the Internal Revenue Code of 1954.

At issue is whether $ 39,800 received by petitioners in 1955 from a corporation, substantially all of the stock of which1964 U.S. Tax Ct. LEXIS 110">*113 was owned by them, in redemption of stock of another corporation was taxable as a distribution essentially equivalent to a dividend under the provisions of sections 301, 302, and 304 of the Internal Revenue Code of 1954. Petitioners have not contested the section 6653(a) addition to tax.

FINDINGS OF FACT

Some of the facts have been stipulated; the stipulation and accompanying exhibits are incorporated herein by this reference.

Petitioners, husband and wife, residing in Sarasota, Fla., timely filed their joint income tax return with the district director of internal revenue, Jacksonville, Fla., for the calendar year ended December 31, 1955.

42 T.C. 291">*292 Prior to 1955 petitioners resided in the Cincinnati, Ohio, area, in nearby Kentucky. During 1955, and for a number of years prior thereto, they owned all of the outstanding capital stock, except qualifying shares, of Swan Construction, Inc., referred to hereinafter as Swan, Inc., an Ohio corporation engaged in the heavy construction business. Charles Swan, hereinafter referred to as petitioner, was the president and a member of the board of directors of Swan, Inc. He actively participated in the management of Swan, Inc., and was primarily1964 U.S. Tax Ct. LEXIS 110">*114 responsible for its success.

During the period May 31, 1952, to January 15, 1954, Swan, Inc., issued salary checks to petitioner as compensation for his services as president in the aggregate net amount of $ 39,377.80, after withholding for taxes. Although petitioner reported such compensation in his returns for the years in which the checks were received, and paid tax thereon, he did not cash or otherwise use them prior to January 25, 1954.

Around the early part of 1954, or prior thereto, petitioner became interested in a possible real estate development venture on property in the vicinity of Alexandria, Va. He made several trips to Alexandria and conferred with a lawyer who advised him to form a Virginia corporation for this purpose rather than to undertake the project through Swan, Inc. Accordingly, Charles Associates, Inc., hereinafter referred to as Charles, Inc., was incorporated for that venture under the laws of Virginia on February 2, 1954. Its total 400 shares of stock were issued pursuant to subscriptions received March 29, 1954, at a stated price of $ 100 per share as follows: 200 shares to Josephine Swan, 198 shares to Charles Swan, 1 share to Ann Brooks (bookkeeper1964 U.S. Tax Ct. LEXIS 110">*115 for the project), and 1 share to Gilbert Frazee (associated with petitioner in the construction business). With the exception of the two qualifying shares, all of the stock of Charles, Inc., was owned continuously by petitioners up to August 17, 1955.

The funds required for the acquisition of the Charles, Inc., stock were supplied in the following manner: On January 25, 1954, petitioner went to the First National Bank of Cincinnati, Ohio, with his aforementioned theretofore uncashed salary checks in the aggregate amount of $ 39,377.80; he then cashed these checks, and used the proceeds together with a personal check and a small amount of additional cash, to purchase a $ 40,000 cashier's check at that bank; shortly thereafter he deposited this cashier's check in a Washington, D.C., bank for use in connection with the Virginia project; and subsequently transferred the funds in that account to an account in another Washington bank in the name of Charles Associates, Inc.

42 T.C. 291">*293 On January 26, 1954, petitioner entered into a contract for the purchase of 46.2983 acres of land in Fairfax County, Va., the land that was subsequently to be developed by Charles, Inc. The record does not1964 U.S. Tax Ct. LEXIS 110">*116 disclose what portion, if any, of the foregoing $ 40,000 was used by petitioner in connection with this contract. He subsequently assigned this contract to Charles, Inc., for "One Dollar ($ 1.00) and other valuable consideration."

At some time, not clearly fixed in the record, a document on a printed form, dated February 3, 1954, was executed, reading as follows:

$ 40,000

Cincinnati, Ohio, February 3, 1954

Josephine On Demand or Chas Swan after date, I, we, or either of us, promise to pay to the order of xxxxxxxxxx the sum of Forty Thousand and 00/100 Dollars, Payable at xxxxxxxxxx with interest at the rate of     per cent per annum from maturity date.

The makers and endorsers hereof severally waive presentment, demand for payment, notice of dishonor, protest and notice of nonpayment and protest of this instrument, and agree and consent to all extensions and/or renewals which the holder hereof may grant.

Value Received.

(signed) Chas Swan

(signed) G. J. Frazee, Treasurer

The words "Josephine" and "or Chas Swan" were inserted by hand in the note in the places appearing above; they were in the handwriting of Charles Swan. 1964 U.S. Tax Ct. LEXIS 110">*117 The X's appearing above deleted the words, "The First National Bank of Cincinnati, Ohio" in the two places where the X's appear.

The books of account of Swan, Inc., which were submitted in evidence do not reflect any liability on a note relating to the foregoing document, nor is there any mention of such a loan in the corporate minutes of Swan, Inc., placed in evidence.

An entry, bearing the date "Apr" 1954, was made in the cash receipts journal of Charles, Inc., to indicate the receipt of cash from Swan, Inc., in the amount of $ 40,000 and a corresponding credit was made to "Notes Pay." The words "Notes Pay" were subsequently crossed out and the words "Capital Stock" inserted in their place.

In the early part of April 1954, petitioner received two checks totaling $ 35,000 from Swan, Inc., which he loaned to Charles, Inc. A note was later issued by Charles, Inc., to Swan, Inc., and petitioner was given credit for a loan to Swan, Inc., on its books.

The real estate venture in Virginia conducted by Charles, Inc., required substantial amounts of capital for labor, material, and equipment. During the period May 1, 1954, through March 10, 1955, Swan, 42 T.C. 291">*294 Inc., made interest bearing1964 U.S. Tax Ct. LEXIS 110">*118 loans for such purposes to Charles, Inc., upon promissory notes in the following amounts:

The balance sheets of Charles, Inc., as of December 31, 1954, 1955, and 1956 reflected the following:

1964 U.S. Tax Ct. LEXIS 110">*119 42 T.C. 291">*295 A "Special Meeting of the Board of Directors of" Swan, Inc., held on August 16, 1955, reflected the following:

The President stated that in view of the fact that this corporation has advanced the sum of approximately $ 365,000 to Charles Associates, Incorporated, which sum is secured by notes and a mortgage of Charles Associates, Incorporated, it would seem to be to the best interests of this corporation to purchase all of the outstanding stock of Charles Associates, Incorporated, in order to better secure the indebtedness.

The President stated further that the stockholders of Charles Associates, Incorporated have offered to sell their stock in the corporation at their cost, to-wit: a total of $ 40,000.

After a lengthy discussion, it was moved, seconded and unanimously carried that this corporation purchase all of the outstanding stock of Charles Associates, Incorporated from the shareholders of said corporation at a total purchase price of $ 40,000, and that the President be authorized to issue checks of this corporation to the respective shareholders of Charles Associates, Incorporated for such stock.

Swan, Inc., purchased the stock of Charles, Inc., from Josephine Swan, 1964 U.S. Tax Ct. LEXIS 110">*120 Charles Swan, Gilbert Frazee, and Ann Brooks by checks dated August 17, 1955, in the following amounts:

On each of the four checks there was a notation that the check was for the purchase of stock.

Swan, Inc., had earned surplus and undivided profits in the amounts of $ 145,245.04, $ 197,452.99, and $ 200,672.14 as of December 31, 1954, 1955, and 1956, respectively.

The balance sheets of Swan, Inc., as of December 31, 1954, 1955, and 1956 reflected the following:

1964 U.S. Tax Ct. LEXIS 110">*121 42 T.C. 291">*296 The balance sheet of Swan, Inc., as of December 31, 1953, shows cash on hand in the amount of $ 2,980 and notes and accounts receivable in the amount of $ 350,782.18. The cash receipts ledger sheet for the month of January 1954 shows cash receipts of $ 171,335.80 during the period January 1, 1954, to January 25, 1954, inclusive, all of which, with the exception of $ 117.25, were received from the Detroit Steel Co. and the U.S. Engineers. The cash disbursements ledger sheet of Swan, Inc., for the month of January 1954 shows that the cash disbursements made during that month were not in excess of $ 34,100.08. No evidence was submitted showing any other cash outlays during that month.

During the year 1952 petitioner's right side and right arm became paralyzed and in 1954 he underwent an operation to correct this condition. In 1952 he decided to discontinue the heavy construction and contracting business of Swan, Inc., and it was completely terminated on or about May 25, 1955, when most of the equipment used in that business was sold at auction for approximately $ 71,000. Equipment retained by the corporation after the sale included a pump, a bulldozer, a trailer, a tractor, 1964 U.S. Tax Ct. LEXIS 110">*122 and various tools which were being used by Charles, Inc., in connection with the Virginia real estate venture. Upon termination of the heavy construction business Swan, Inc., engaged in the loan and investment business, which it had commenced in 1954 or 1955, and it is presently in that business.

In 1957 Swan, Inc., liquidated its subsidiary, Charles, Inc., acquiring all of its assets and assuming its liabilities.

OPINION

The Commissioner determined that "your receipt of $ 40,000.00 in cash from the Swan Construction Company in exchange for the stock of Charles Associates, Inc., constitutes a taxable dividend in accordance with the provisions of Section 301, 302, 304, 316 and 318 of the Internal Revenue Code of 1954." ¹

There is no dispute between the parties that the purchase of petitioners' Charles, 1964 U.S. Tax Ct. LEXIS 110">*123 Inc., stock by Swan, Inc., falls literally within the words of section 304 of the 1954 Code, so that the distribution by Swan, Inc., is to be treated as though it were redeeming its own stock. ²42 T.C. 291">*297 There is also no dispute that such redemption is covered by section 302(d)³1964 U.S. Tax Ct. LEXIS 110">*124 and hence is taxable as a dividend under section 301⁴ unless the redemption "is not essentially equivalent to a dividend" under section 302(b)(1). ⁵

Petitioners' primary position seeks to cut across these exasperatingly complex provisions, cf. Thomas G. Lewis, 35 T.C. 71">35 T.C. 71, 35 T.C. 71">76. They contend that they never in fact owned any Charles, Inc., stock, that they never sold any such stock to Swan, Inc., and that therefore the foregoing statutory provisions have no application at all to this case. They argue that Swan, Inc., was the real owner of the Charles, Inc., stock from the beginning, that petitioner1964 U.S. Tax Ct. LEXIS 110">*125 had lent $ 40,000 to Swan, Inc., to buy that stock, that the stock was issued in petitioners' names merely to secure that loan, and that the redemption of the Charles, Inc., stock was nothing more than the repayment of that debt. We cannot agree. The burden of proof is upon petitioners. The record that they made before us is highly confusing, the evidence upon which they rely is unconvincing and at times contradictory, and their position conflicts in important respects with the stipulation of facts filed by the parties. We hold that they have failed to carry their burden of proof.

Petitioners make a related argument that the August 17, 1955, redemption of the Charles, Inc., stock was in substance only a "final 42 T.C. 291">*298 settlement of salary due" to petitioner Charles Swan on which income taxes had already been paid, citing Estate of Henry A. Golwynne, 26 T.C. 1209">26 T.C. 1209. This contention is spurious. True, petitioner held uncashed salary checks of Swan, Inc., in the aggregate amount of $ 39,377.80 upon which he had paid taxes. But he cashed those checks on January 25, 1954, and on that date used the proceeds, together with some other funds, to purchase1964 U.S. Tax Ct. LEXIS 110">*126 a $ 40,000 cashier's check which subsequently found its way into the Virginia real estate development venture. The canceled salary checks are in evidence, and the word "Paid" is perforated on each one of them, as is also the date "1-25-54." The fact that he invested the proceeds of the salary checks shortly thereafter in the Virginia real estate development hardly justifies characterizing the August 17, 1955, redemption as a "final settlement" of the salary due to petitioner. He in fact received that salary long before the redemption. The Golwynne case is clearly distinguishable. ⁶

1964 U.S. Tax Ct. LEXIS 110">*127 Contrary to petitioners' position, section 302(b)(1) is squarely involved, and the Commissioner's determination must be sustained unless the redemption was "not essentially equivalent to a dividend." Swan, Inc., had a large surplus at the time of its purchase of the Charles, Inc., stock from petitioners, and petitioners in no realistic way parted with their control over or their actual interest or investment in the Charles, Inc., enterprise, for, apart from qualifying shares, they were the sole stockholders of Swan, Inc. ⁷ In substance, the redemption was nothing more than a distribution of cash to them by Swan, Inc., out of its accumulated earnings and profits. Nor are we satisfied on the record that there was a bona fide business reason for the redemption. And in 42 T.C. 291">*299 any event, the existence of a business purpose will not, of itself, require that the transaction be classified as "not essentially equivalent to a dividend." Cf. United States v. Fewell, 255 F.2d 496, 500 (C.A. 5); Bradbury v. Commissioner, 298 F.2d 111, 118 (C.A. 1), affirming a Memorandum Opinion of this Court; Thomas Kerr, 38 T.C. 723">38 T.C. 723, 38 T.C. 723">732,1964 U.S. Tax Ct. LEXIS 110">*128 affirmed 326 F.2d 225 (C.A. 9).

In arguing that the distribution was not essentially equivalent to a dividend, petitioners refer to the contraction of the heavy construction business of Swan, Inc., thereby1964 U.S. Tax Ct. LEXIS 110">*129 seeking to establish that the distribution was in liquidation or partial liquidation of Swan, Inc. While it is true that Swan, Inc., began to discontinue its heavy construction business as early as 1952, it subsequently entered the mortgage loan business and by absorbing Charles, Inc., it also continued the latter's venture. And there is no showing that its need for capital in its new activities was materially less than in the heavy construction business. Cf. Estate of Charles Chandler, 22 T.C. 1158">22 T.C. 1158, 22 T.C. 1158">1166, affirmed 228 F.2d 909 (C.A. 6). Moreover, there is no convincing evidence that the August 1955 redemption was in any way related to the termination of the heavy construction business. We hold that petitioners have failed to establish that the redemption was not essentially equivalent to a taxable dividend. Cf. United States v. Fewell, 255 F.2d 496, 499-500 (C.A. 5); Ferro v. Commissioner, 242 F.2d 838, 841 (C.A. 3); Flanagan v. Commissioner, 116 F.2d 937, 939 (C.A. D.C.); Jones v. Griffin, 216 F.2d 885, 8871964 U.S. Tax Ct. LEXIS 110">*130 (C.A. 10); Thomas Kerr, 38 T.C. 723">38 T.C. 723, 38 T.C. 723">729-730, affirmed 326 F.2d 225 (C.A. 9); Genevra Heman, 32 T.C. 479">32 T.C. 479, 32 T.C. 479">487, affirmed 283 F.2d 227 (C.A. 8). We have viewed all the evidence before us in the light of the various criteria regarded as pertinent in the foregoing cases and have concluded that the redemption distribution herein must be regarded as essentially equivalent to a taxable dividend.

Decision will be entered under Rule 50.