And I hereby covenant that I am the lawful owner of said goods; that they are free from all encumbrances; that I have the right to sell the same as aforesaid; and that I will warrant and defend the same against the lawful claims and demands of all persons.

In Witness Whereof, I have hereunto set my hand this 15th day of March, 1956.

(S) Adolph Weinberg.

Adolph Weinberg.

Following is a description of the produce purportedly assigned to 44 T.C. 233">*238 each of the corporations by the bills of sale referred to above and the dates appearing thereon:

1965 U.S. Tax Ct. LEXIS 80">*92 The books and records of the Holtville partnership were kept by one of the three partners, E. N. D. Hatch, who handled the partnership's sales of produce. Hatch first learned that petitioner was organizing the corporations in a telephone conversation with petitioner's accountant in late February 1955. He was told that petitioner's interest in the crops from certain farmlands had been assigned to the several corporations and that he would be furnished a list of the crops belonging to each corporation. Petitioner gave similar notice to Holly. The harvesting of the first of these crops, the sugar beets, was begun early in March 1955. As sales of the produce were made, the proceeds were deposited by Holly in separate accounts in local banks to the credit of the corporations designated to receive them. The bank accounts for the corporations were opened by Hatch for that purpose. Deposit slips were made out for each deposit and a copy was sent to petitioner's accountant.

The corporations all adopted, for accounting purposes, fiscal years as follows: Lion, Gold, and Chief adopted the fiscal year ending August 31; E T, the fiscal year ending February 28; Lettuce, Vegetable, Best, and1965 U.S. Tax Ct. LEXIS 80">*93 Imperial, the fiscal year ending March 31; Girard, the 44 T.C. 233">*239 fiscal year ending April 30; Shannon, Brookside, Parsons, and A. W., the fiscal year ending June 30; and Sugar, the fiscal year ending July 31. Their returns were filed on the basis of such fiscal years.

The crops grown by the Holtville partnership, those in which petitioner had an interest, included about 600 acres of lettuce, 200 acres of carrots, 135 acres of beets, 80 acres of flax, and 30 or 40 acres of cabbage.

Loans amounting to $ 280,900 were made by the several corporations in 1955 to Coast Grain Co. on its 6 months' promissory notes bearing 6-percent interest. The moneys were used by Coast Grain Co. for loans to its customers.

All of the petitioner corporations have continued in existence up to the present time. They have all regularly kept separate books and accounts and have filed income tax returns showing their receipts from the sale of farm produce and expenses incurred in their operations. Some of them, from time to time, have entered into lease agreements and partnership agreements with third parties pertaining to farming operations. Petitioner has continued as their president and sole stockholder1965 U.S. Tax Ct. LEXIS 80">*94 and has conducted most of their affairs. As president of the corporations, he performed about the same services on their behalf as he had previously performed on his own behalf, such as acquiring leases, contracting with farmers, and financing farm operations. The corporations did not do the actual farming.

The assigned crops were given a cost basis of zero both by petitioner and the corporations. The books and records and returns of neither petitioner nor the corporations show any gain or loss on petitioner's assignment of produce to the corporations or his receipt of the corporations' stock.

In its partnership returns for the calendar years 1955 and 1956, the Weinberg partnership reported total income in the respective amounts of $ 436,586.30 and $ 429,634.92. These amounts included rentals from "Imperial Valley Ranches" of $ 159,829.50 in 1955 and $ 169,283.48 in 1956 and interest in the respective amounts of $ 102,889.07 and $ 81,406.91. Neither the partnership nor petitioner individually reported any income from the sale of farm produce by or on behalf of any of the corporations. The several corporations reported total income of $ 239,994 in 1955 and $ 177,086.12 in 1956.

1965 U.S. Tax Ct. LEXIS 80">*95 In March 1955, E T formed a partnership with Stafford-Hannon to raise cotton on approximately 700 acres of Imperial Valley farmland. Hannon agreed to lease the land to the partnership for one-quarter of the cotton produced, with a guaranteed rental of $ 60 per acre, and was to receive a salary of $ 6,400 per year. The partnership profits and losses were to be shared equally by Hannon and E T. The partnership reported net profits of $ 4,841.12 in the calendar year 1955 and $ 10,767.95 in 1956.

44 T.C. 233">*240 Respondent determined in his notice of deficiencies to Adolph and Etta Weinberg that the 14 above-named corporations are not recognizable tax entities and that the income reported by them in 1955 and 1956 is all taxable to them (Adolph and Etta Weinberg). He further determined in deficiency notices to the several corporations that they were entitled, collectively, to only one surtax exemption. The deficiencies determined against them result entirely from this adjustment. He made no changes in the income and expenses reported by the corporations in their returns.

Income tax returns for the several corporations for their respective fiscal years ending in 1955 were all filed on the1965 U.S. Tax Ct. LEXIS 80">*96 same date, October 17, 1955. For some of the corporations the returns were timely and for others, including A. W., Best, Brookside, Imperial, Lettuce, Parsons, Shannon, and Vegetable, they were delinquent. The reasons given for the belated filings were that petitioner was in Europe at the time for filing and his accountant who had been instructed to file the returns negligently failed to do so.

The stipulated facts are included herein by this reference.

OPINION

In his notice of deficiences to Adolph and Etta Weinberg, docket No. 93361, respondent determined that the 14 above-named corporations were not recognizable tax entities and that the income attributed to them was all income of the Weinberg partnership. He further alleged "in the alternative" that if such corporations are entitled to recognition, then, clearly to reflect income, either the proceeds from the sale of the crops should be imputed to the partnership which performed all of the services and bore all the expenses of producing the crops or the costs of production should be allowed as deductions to the corporations and not the partnership.

Petitioners alleged in their petition that --

(d) The Commissioner erred in 1965 U.S. Tax Ct. LEXIS 80">*97 determining that the income reported by each of the corporations was properly reportable by the Adolph and Etta Weinberg Partnership or by the petitioners.

(e) The Commissioner erred in determining that the Adolph and Etta Weinberg Partnership created or earned or controlled the income of each of the corporations.

These allegations are denied, generally, in respondent's answer. Counsel for respondent in his opening statement at the trial stated:

Respondent expects the evidence in this case to show that neither harvested nor unharvested crops were transferred to these corporations but rather the proceeds from the sale of these crops were given to the corporations as capital.

These proceeds were income to the individual petitioners which they attempted to assign to the corporations before including it in their own income.

In his briefs respondent's chief argument is that the proceeds from the sale of the crops should be included in the income of the Weinberg 44 T.C. 233">*241 partnership for the reason that the harvested crops were in fact sold by the partnership and the income realized by the partnership. This contention, we think, is not a departure from respondent's determination or the1965 U.S. Tax Ct. LEXIS 80">*98 pleadings, but merely offers a different reason than that advanced in the notice of deficiency for the inclusion of the proceeds from the crop sales in the partnership income.

On the evidence of record we think the factual conclusion is inevitable that what was assigned to the several corporations in exchange for their stock was not crops, either growing or harvested, but the proceeds from the sale of the crops. The only tangible evidence of any actual transfers to the corporations are the bills of sale made out by the petitioners to the corporations allegedly in part consideration for their stock. The purported assignments in the twelve 1955 bills of sale were of certain specified crops, such as so many tons of beets or so many crates of lettuce. Taken at face value these bills of sale would indicate that what was assigned to the corporations was harvested, and not growing, crops as petitioners contend. However, at the time when the bills of sale were executed, the crops had all been harvested and sold and the proceeds deposited in bank accounts of the several corporations.

At the trial respondent presented evidence tending to show that none of the bills of sale were in fact 1965 U.S. Tax Ct. LEXIS 80">*99 prepared until sometime during 1958 or early in 1959, and about a year after the examining revenue agent had requested them. The dates appearing on the bills of sale and the actual dates of their execution are, we think, of no great importance here. It is not disputed that these bills of sale were all executed after the crops had been harvested and sold and were predated to coincide with the first meetings of the corporations' boards of directors. Likewise, the minutes of the corporations relating to the issuance of their stock show that they too were predated. For instance, the minutes of the first meeting of the directors of Sugar Daddy, Inc., ² dated May 4, 1955, denoted an acceptance from petitioners, in payment of its capital stock, of the same quantity of barley and flax described in the predated bill of sale bearing the same date. Until the harvesting was completed, there was no way in which the exact quantities of the crops specified in the bills of sale and the minutes could be ascertained.

1965 U.S. Tax Ct. LEXIS 80">*100 The "growing crops" referred to in the bills of sale bearing 1956 dates were harvested and sold in the same manner. These bills of sale purported to represent additional contributions of capital to the corporations.

On the evidence before us we determine that petitioners transferred to the corporations neither growing nor matured crops but the proceeds 44 T.C. 233">*242 from the sale of crops. These transfers occurred independently of the bills of sale when, under petitioners' direction, the proceeds from the sales were deposited in the corporations' bank accounts. We further determine that the crops were the property of the partnership at the time they were sold and that the proceeds from the sales were the income of the partnership.

In their briefs petitioners state:

The purported inclusion by the respondent of the proceeds from the sales of the farm crops transferred to the corporations in 1955 in the income of Adolph is an attempt by the respondent to disregard the provisions of Section 351 of the Code, which prohibits the recognition of any gain or loss to Adolph on the transfer of the farm crops to the corporations in exchange for their stock. This, the Commissioner has no power1965 U.S. Tax Ct. LEXIS 80">*101 to do. Hanover Bank v. Commissioner., 369 U.S. 672">369 U.S. 672, 369 U.S. 672">687-688 (1962), 62-1 U.S.T.C. Para. 9487; Lewyt Corp. v. Commissioner., 349 U.S. 237">349 U.S. 237 (1955) 75 S. Ct. 736">75 S. Ct. 736, 55-1 U.S.T.C. Para. 9460; 36 T.C. 1027">South Lake Farms, Inc., supra. * * *

What respondent has included in petitioners' income is not the gain from the transfer of the crops to the several corporations in exchange for their stock but rather the entire purchase price paid on the sale to third parties of the crops themselves.

In South Lake Farms, Inc., 36 T.C. 1027">36 T.C. 1027, affd. 324 F.2d 837, we held that a transfer of land and leaseholds and the growing crops thereon by one corporation to another in complete liquidation of the transferor corporation did not result in any gain to the transferor. The decision turned on the fact that there was a transfer of the land and leaseholds, as well as the growing crops, before any of the crops had been harvested and sold. It was based largely on our decision in Elsie SoRelle, 22 T.C. 459">22 T.C. 459.1965 U.S. Tax Ct. LEXIS 80">*102 There, a father had made gifts to his children of several parcels of land, together with the crops growing thereon. We held that the income from the sale of the crops was taxable to the children and not the father. In that case we relied largely upon Pearce v. Commissioner, 315 U.S. 543">315 U.S. 543, where a wife, and not the husband, was held taxable on the income from an annuity contract which the husband had purchased for her in a predivorce agreement. The Court distinguished the Horst, Eubank, and Harrison v. Schaffner³ cases on the grounds that the husband had parted with not only the right to receive the income but the corpus which produced it.

In the instant case, petitioner did not purport to transfer1965 U.S. Tax Ct. LEXIS 80">*103 to the corporations any land or leaseholds, but only the crops growing thereon. At stated above, the only tangible evidence of any transfers to the corporations are the bills of sale. Those dated in 1955 specified certain crops and produce which had already been harvested and sold. Actually, since the crops had already been sold, the only thing relating 44 T.C. 233">*243 to the crops petitioners could have owned, or assigned to the corporations at that time, was the proceeds from the sales of the crops.

It is argued by petitioners that the agreements between petitioners and the corporations regarding the assignment of growing crops should be construed according to the intention of the parties which, they argue, was that ownership of the growing crops should vest in the corporations at or about the time petitioners informed the farmers and buyers that the crops from certain designated fields would belong to the corporations. Any such agreement would have had to be between petitioner, representing the Weinberg partnership, and the directors of the several corporations. There is no proof of such an agreement. At most, there was only petitioner's expressed intention to sometime in the future1965 U.S. Tax Ct. LEXIS 80">*104 assign the growing crops to the corporations.

The situation with respect to the 1956 bills of sale is somewhat different in that these bills of sale did specify the "growing crops" on certain farms. However, the evidence is that these crops were handled in the same manner as those referred to in the 1955 bills of sale and, we think, with the same tax consequences.

Aside from the normally difficult factual and legal questions presented, we are here confronted with a confused situation in the evidence. The parties have stipulated that the stock of each of the corporations was issued to petitioners "in exchange for $ 1,000 cash and farm crops." This stipulation is not inconsistent with respondent's first alternative determination that --

inasmuch as the partnership performed the services and incurred all of the expenses attributable to the matured crops which were transferred to the fourteen corporations, the sales proceeds should be imputed to the partnership in order clearly to reflect income.

However, the evidence of record, we think, clearly shows, and we have determined, that the proceeds from the sale of the crops, rather than growing or matured crops themselves, were transferred1965 U.S. Tax Ct. LEXIS 80">*105 to the corporations by petitioners in exchange for their stock. Respondent makes this argument, for the first time, in his final brief and further argues that the stipulation to the contrary should be disregarded. He points out that the stipulation was filed at the opening of the trial before introduction of the evidence showing the predating of the bills of sale and corporate minutes and that it is not inconsistent with any position then taken by respondent in his determination of the deficiencies.

In our study of the evidence as a whole we are convinced that the stipulation is erroneous and that, as we have found, it was cash proceeds from the sale of the crops that were transferred to the corporations in exchange for their shares of stock.

44 T.C. 233">*244 The wording of the stipulation (as to the stock issued by Chief Farms, Inc.) is that --

A permit authorizing the issuance of stock was duly issued by the California Commissioner of Corporations on October 24, 1955, pursuant to the application of CHIEF therefor and the stock was duly issued to ADOLPH on October 30, 1955, in exchange for said $ 1,000.00 cash and farm crops.

The stipulation as to the other corporations is in the 1965 U.S. Tax Ct. LEXIS 80">*106 same language. We take the stipulation to mean no more than that the stock of the corporations was issued nominally for $ 1,000 cash and farm crops. At the time the stipulation was prepared, there was no contention between the parties as to whether farm crops or the equivalent in cash was paid in for the stock. Respondent was then relying on his determination that the corporations, in any event, were not entitled to recognition as tax entities. The stipulation could not have been intended to foreclose inquiry as to whether crops or the cash equivalent was paid in for stock. That question had never been raised.

Even if construed literally the stipulation would have to be rejected as being contrary to the preponderance of the other evidence. William Ernest Seatree, 25 B.T.A. 396">25 B.T.A. 396, affd. 72 F.2d 67. We said in that case:

It is stipulated that the assignment was executed and delivered to the Equitable Trust Company on June 29, 1922. We refuse to be bound by that stipulation, for it appears to be contrary to fact as disclosed by the record. * * *

And see Gunderson Bros. Engineering Corp., 42 T.C. 419">42 T.C. 419, 42 T.C. 419">436.1965 U.S. Tax Ct. LEXIS 80">*107

For other reasons, too, we think respondent's determination that the income from the sale of the crops allegedly assigned to the corporations must be included in the income of the Weinberg partnership should be sustained. In United States v. Lynch, 192 F.2d 718, the income from the sale of apples which a storage and warehouse corporation had purportedly distributed in kind to its stockholders but actually retained in its possession and sold in the course of its regular business was held taxable to the corporation. The court said:

We understand appellant to contend that the income in question is not that of the corporation. The answer is, that the corporation has performed the services which create the right to the income which brings into play the basic rule that income shall be taxed to him who earns it. Helvering v. Eubank, 1940, 311 U.S. 122">311 U.S. 122, 61 S. Ct. 149">61 S. Ct. 149, 85 L. Ed. 81">85 L. Ed. 81. A corporate liquidation and transfer of assets cannot divert taxability of income already earned any more than does an assignment of such income. Cf. Helvering v. Horst, 1940, 311 U.S. 112">311 U.S. 112, 61 S. Ct. 144">61 S. Ct. 144, 85 L. Ed. 75">85 L. Ed. 75;1965 U.S. Tax Ct. LEXIS 80">*108 311 U.S. 122">Helvering v. Eubank, supra.

To the same effect is A.B.C.D. Lands, Inc., 41 T.C. 840">41 T.C. 840, where the corporate taxpayer distributed to its stockholders in kind the warehouse receipts from grain which its tenant farmers had produced and delivered to a storage terminal. We held that this was an attempted anticipatory assignment of income which was taxable to the corporation.

44 T.C. 233">*245 The same basic principle applies here. Practically all of the services contributing to the production of the income were performed by petitioner or those representing the partnership. In a very true sense the income was all earned by the petitioners.

The impact of the Lynch and A.B.C.D. Lands, Inc. cases and the authorities there relied upon is not lessened by the fact that the purported assignments of the crops here were made by the stockholder to his corporations rather than by a corporation to its stockholders. Nor does the applicability of the rule require a determination as to whether there were effective assignments of growing or harvested crops. If the assignments were of income already earned whether 1965 U.S. Tax Ct. LEXIS 80">*109 or not their purpose was tax avoidance, they do not shift the burden of tax on such income.

There is no doubt in our minds, however, that tax avoidance was at least one of the purposes of the attempted assignment of the growing crops to the corporations. If the corporations had been organized primarily for the other purposes claimed by petitioner, ⁴ no plausible reason has been shown why the growing crops should have been assigned to them. Up to the time the crops were harvested and sold the corporations were mere shells without any assets or business activities. When the corporations did come into funds after and from the sale of the crops, they loaned the money to another of petitioner's corporations, Coast Grain Co.

1965 U.S. Tax Ct. LEXIS 80">*110 With this disposition of the principal issue it becomes unnecessary to decide the other issues raised in the pleadings. The elimination from the corporations' income of the proceeds from the sale of the crops allegedly assigned to them leaves them without any income or tax liability in the years before us. We note that counsel for respondent was unable or unwilling to say at the time of the hearing what position the Commissioner of Internal Revenue is taking with respect to the recognition of the corporations as separate tax entities in years subsequent to 1955.

Decisions will be entered under Rule 50.