Most subcontractors also carried workmen's compensation coverage.

All Burnt Mills Park and Foxhall homes were sold on a commission basis exclusively through an independent real estate agency. The real estate agency uniformly used a preprinted contract form for all home sales. The contract form showed only the printed name of the real estate agency and subdivision. Upon sale of a home, petitioner, Revitz, or Sherman would execute the sales contracts and indicate the name of the appropriate Colt entity as seller.

The following schedules reflect the Colt corporations' taxable income and earned surplus and retained earnings as reported on their Federal income tax returns for the years 1959 through 1974 U.S. Tax Ct. LEXIS 93">*106 May 31, 1966: 62 T.C. 331">*337

62 T.C. 331">*338

62 T.C. 331">*339 For the following taxable years, Gerasi reported the following on its partnership returns (Forms 1065) for the calendar years indicated:

Initially, Sherman was president of each of the five Colt corporations; Greenberg was vice president and treasurer; and Revitz was secretary.

Pursuant to a single buy-out agreement dated June 8, 1964, Sherman redeemed his shares in each Colt corporation and sold his one-third interest in Gerasi to Greenberg and Revitz. After June 8, 1964, Revitz was president of each of the five Colt corporations and Greenberg was secretary and treasurer.

Pursuant to a single agreement dated May 20, 1966, Greenberg purchased Revitz' interest in Gerasi, and Revitz redeemed his 500 shares in Development; then Greenberg and Revitz simultaneously "liquidated" 1974 U.S. Tax Ct. LEXIS 93">*109 Builders, Contractors, Homes, and Properties. After May 20, 1966, Greenberg was president of the then "unliquidated" Development and assumed the title of president for the 62 T.C. 331">*340 then "liquidated" Builders, Contractors, Homes, and Properties for the purpose of carrying out final postliquidation matters.

In early years each Colt entity paid officers' salaries to petitioner, Sherman, and Revitz which were authorized by separate corporate resolutions. After October 1962, general journal entries show that officers' compensation was being calculated on an identical per-house basis. Petitioner, Sherman, and Revitz were paid $ 1,500 per house by each Colt entity until Sherman withdrew from the business and thereafter petitioner and Revitz each received $ 1,700 and $ 2,000 per house. Development also had paid employees in addition to its officers but at no time did any of the other Colt corporations have any such employees.

Interest expense on purchase-money mortgages was paid by Gerasi and subsequently allocated to each Colt corporation by means of appropriate journal entries.

Construction financing, as well as loans to Gerasi for acquisition of the land, was provided by Interstate Building Association, 1974 U.S. Tax Ct. LEXIS 93">*110 H. L. Rust Co., and Suburban Trust Co. through individual mortgages on lots. These construction loans were secured by separate deeds of trust and separate insurance policies covering each house. The aggregate amount of the construction mortgage loan proceeds was disbursed among the Colt corporations weekly in a single transaction in accordance with a progress schedule. Petitioner, Sherman, and Revitz were usually required to personally endorse the mortgage notes for construction loans.

After Sherman left the business, petitioner and Revitz obtained additional operating capital through personal loans from Suburban Trust Co. On November 23, 1965, petitioner and Revitz each requested separate $ 300,000 1-year loans from the trust company. Revitz' loan application stated in part:

Purpose Loans to corporations for operating capital (Corporations will pay loans and accounts due to and from each other)

Source of Repayment Liquidation of 4 corporations.

Collateral -- None -- Suggest we obtain a guarantee from GREENBERG, et ux and vice versa on each $ 300,000 loan

Remarks -- Will maintain compensating balances in all accounts of at least $ 500,000. They have ample capital now to continue 1974 U.S. Tax Ct. LEXIS 93">*111 construction program in FOXHALL. Twenty-eight houses under construction (twenty under roof -- eight footings, fourteen sold). Forty-three lots to be built upon. Have built and sold 280 houses in subdivision. After corporations are liquidated in one year, will continue building in one corporation and the partnership.

62 T.C. 331">*341 In a later related loan application on March 8, 1966, requesting an additional $ 50,000, Revitz again indicated the plans to liquidate "some" of the corporations in the following 3 to 6 months.

Prior to the liquidation of the corporations, petitioner and Revitz had disagreements concerning Revitz' right to engage in various unrelated business ventures exclusive of petitioner. In order to resolve their dispute, petitioner, Revitz, and Development entered into the previously mentioned buy-out agreement on May 20, 1966, providing for Revitz' sale to petitioner of his one-half interest in Gerasi for $ 172,292.52; for Development's redemption of Revitz' 500 shares of stock for $ 118,250.61; and Revitz' resignation as an officer and director of Development. In addition petitioner and Revitz agreed to cooperate with one another in effecting the final dissolutions of Homes 1974 U.S. Tax Ct. LEXIS 93">*112 and Properties before March 31, 1967.

On May 24, 1966, Greenberg and Revitz caused Builders, Contractors, Homes, and Properties to adopt identical resolutions of liquidation.

Consistent with these corporate resolutions, Builders, Contractors, Homes, and Properties filed final U.S. corporate income tax returns for short tax periods ending May 31, 1966, which showed beginning balance sheets and final earnings as follows:

1974 U.S. Tax Ct. LEXIS 93">*113 62 T.C. 331">*342 Consistent with the May 24, 1966, separate resolutions, information returns were filed, showing the following distributions as of May 31, 1966:

After the "liquidations" Development continued to construct and sell houses in Foxhall and subsequently in other areas of Montgomery County, Md. Gerasi began participating along with Development in the sale of Foxhall homes in 1966 and 1967.

After completion of the Foxhall subdivision, Development and Gerasi began building homes in Stonegate subdivision. Gerasi acquired at least 62 lots in Stonegate. Development entered into agreements with subcontractors for the construction of Stonegate homes as early as September 1966.

Development presently 1974 U.S. Tax Ct. LEXIS 93">*114 maintains an address in Stonegate, Silver Spring, Md. The Stonegate subdivision includes Crimson Oaks, the first part of which Development built. The remaining houses in Crimson Oaks were built by petitioner's wholly owned and unincorporated Raymond Greenberg Construction Co. Development is also constructing homes in the 120-house Peachwood subdivision. In Peachwood, Development contracts to build houses for another partnership of which Greenberg is part owner.

With respect to the distributions received from Builders, Contractors, Homes, and Properties, Greenberg reported the following on his 1966 joint Federal income tax return:

62 T.C. 331">*343 Respondent in his notice of deficiency determined that the amounts reported by petitioner as capital gains received in exchange for his stock in fact constituted ordinary income and disallowed Greenberg's 1974 U.S. Tax Ct. LEXIS 93">*115 claimed section 1202 deduction.

ULTIMATE FINDINGS OF FACT

The four "liquidated" Colt corporations lacked any separate or independent business purpose apart from the unliquidated Development, whose inseparate and common building business was not terminated or otherwise interrupted by the four "liquidations."

The earnings and profits of the four "liquidated" Colt corporations were solely derived from the earnings and profits of a single business comprised of the five Colt corporations which business was not terminated nor otherwise interrupted by the four Colt corporations' "liquidations."

OPINION

Although at the trial petitioner's objection to the introduction of certain evidence on the ground that it was obtained by respondent's agent Zoslow prior to the trial of this case in violation of section 7605 (b), I.R.C. 1954, ^{11974 U.S. Tax Ct. LEXIS 93">*117} was overruled, petitioner on brief argues that we should reconsider this ruling and disregard this evidence. This evidence consists of parts of records which respondent subpoenaed from petitioner. Petitioner could have brought the requested records to court. Instead, "because of the scope and amount of material involved," he chose to allow respondent's agent Zoslow access 1974 U.S. Tax Ct. LEXIS 93">*116 to seven file cabinets from which to obtain information or copies from those books and records requested in the subpoenas duces tecum for use at the trial. Zoslow's review of petitioner's files was with the permission of petitioner who chose not to ferret out the requested records by himself and in effect requested that the agent go over the subpoenaed records to relieve him of the trouble of bringing them to court. Section 7605(b) is not directed to circumstances such as here presented and none of the cases relied on by petitioner bear any factual resemblance to the facts here present. We will therefore not reconsider our ruling at the trial admitting evidence obtained as a result of Zoslow's inspection of subpoenaed records.

62 T.C. 331">*344 Respondent takes the position that distributions made to petitioner allegedly in liquidation of four of the five Colt corporations do not qualify for capital gains treatment, since the formal dissolution of Homes, Builders, Contractors, and Properties did not interrupt or terminate petitioner's single integrated business enterprise of constructing residential subdivisions. Respondent bases his argument primarily on the contention that the multiple corporations were shams, that there was no real independent business purpose in their separate creation and utilization, and that throughout the existence of all the Colt corporations in substance all income from the development and sale of property was earned by Development which continued in existence when the other corporations were liquidated. Respondent contends therefore that the distributions made to petitioner should not be considered liquidating distributions in exchange for petitioner's entire stock interest under section 331(a)(1)² because petitioner still holds 500 shares of Development which has not ceased doing business, and that the amounts paid to petitioner are distributions 1974 U.S. Tax Ct. LEXIS 93">*118 of earnings and profits of an ongoing enterprise, taxable as ordinary income.

In the alternative, if we find that the four Colt corporations were not shams, respondent contends that capital gain treatment provided under section 331 must be disallowed because petitioner, along with Revitz and Sherman, acquired control of the Colt corporations for the principal purpose of the "evasion or avoidance of Federal income tax by securing the benefit of a deduction, credit, or other allowance which such person or corporation would not otherwise enjoy." Sec. 269(a) (2).

We have faced the issue of the shamness of multiple corporations previously in Aldon Homes, Inc., 33 T.C. 582">33 T.C. 582 (1959), upon which respondent relies, and Shaw Construction Co., 35 T.C. 1102">35 T.C. 1102 (1961). Although there are slight gradations of tone and minor variations in texture, the facts and evidence in this case paint a picture which in essence is the same as the Aldon and Shaw cases. In Aldon, 1974 U.S. Tax Ct. LEXIS 93">*119 we found that the multiple corporations lacked any substantial business purpose for organization as such and that none of the corporations engaged in any independent substantive business activities. Therefore, we did not recognize their separateness for tax purposes and under section 22(a), I.R.C. 1939, attributed their entire net income to one corporate taxpayer.

In Shaw, we again upheld respondent's attribution of all income derived from the development and sale of residential property to the 62 T.C. 331">*345 taxpayer, Shaw Construction Co., based on our finding that "the multiple corporations * * * were shams, existing in name only, serving no business purpose and in reality performing no business or other functions." We consider respondent's position in the case at bar to be squarely supported by both these cases.

As we recognized in Aldon and Shaw, taxpayers are entitled to cast their business transactions so as to minimize their tax liability. Gregory v. Helvering, 293 U.S. 465">293 U.S. 465 (1935); United States v. Cumberland Pub. Serv. Co., 338 U.S. 451">338 U.S. 451 (1950). At the same time, the Government may challenge and disregard the form so chosen if it is unreal or a sham. As stated in Moline Properties v. Commissioner, 319 U.S. 436">319 U.S. 436, 319 U.S. 436">439 (1943), 1974 U.S. Tax Ct. LEXIS 93">*120 so long as the purpose of a corporation "is the equivalent of business activity or is followed by the carrying on of business by the corporation" it remains a separate entity, but "in matters relating to the revenue, the corporate form may be disregarded where it is a sham or unreal. In such situations the form is a bald and mischievous fiction."

We have considered the evidence both documentary and testimonial in the record before us, and conclude that the Colt entities, other than Development, were not organized for any business purpose and did not engage in any business separate from Development. These corporations served no purpose except to obtain a tax benefit which is not "business" sufficient to grant them recognition as separate "tax-worthy" entities for Federal tax purposes. National Investors Corporation v. Hoey, 144 F.2d 466, 468 (C.A. 2, 1944); 33 T.C. 582">Aldon Homes, Inc., supra at 597.

Petitioner contends that the five corporations were separate entities which took title to the property, arranged for improvements to lots, paid for construction and arranged the sale of homes thereon, and that use of five corporations instead of one was necessary to limit liability. Petitioner 1974 U.S. Tax Ct. LEXIS 93">*121 further contends that there is no evidence that he and his associates acquired control of the five Colt corporations for the principal purpose of evading or avoiding taxes, and that "even if there were such evidence, the proposed disallowance of the capital gain credit is clearly unauthorized by" section 269.

Finally, petitioner argues that, even if respondent can successfully show a lack of business purpose during the existence of a corporation, this does not preclude the applicability of section 331, "provided that the distribution in liquidation was made by a corporation having separate legal existence."

With regard to petitioner's primary contention, we do not consider the nominally separate activities of the Colt entities to reflect the operation of five independent businesses. It is clear from the evidence 62 T.C. 331">*346 in the record that petitioner and his associates, either through Gerasi or Development, performed all work necessary to the development and sale of homes in Burnt Mills Park and Foxhall. The evidence shows that Homes, Builders, Contractors, and Properties were no more than shells. These "corporations" had no employees or assets, shared offices, officers, and directors, and 1974 U.S. Tax Ct. LEXIS 93">*122 did not do any business unless they could be considered to be doing business in the development of the two subdivisions, Burnt Mills Park and Foxhall, which in our view in substance they cannot. The actual development activities were planned and carried out as part of a single integrated venture, with no attempt to distinguish between the Colt entities. The organization of more than a single corporation added nothing to the enterprise and caused unnecessary duplication of bookkeeping and other activities. Petitioner justifies this wasteful duplication of activities by claiming that management feared tort and other liability inherent in developing a subdivision of such substantial size. Petitioner cites Southern Dredging Corp., 54 T.C. 705">54 T.C. 705 (1970), to illustrate that a business purpose of limiting liability warrants the creation and recognition of several corporations, despite identical ownership and management and similar business activities. In Southern Dredging, two brothers operating a partnership decided to organize four corporations, one of which leased and operated three dredges, each dredge being owned by a separate corporation. The formation of separate entities was precipitated 1974 U.S. Tax Ct. LEXIS 93">*123 by the expansion of operations into more hazardous dredging operations in inland waterways. We recognized the presence of a valid business purpose of insulating one corporation's assets against the others' liabilities in this hazardous activity. We stated that the fact that all four corporations shared the same offices, address, telephone, repair service, and management and had all their bookkeeping performed by one individual did "not detract from the validity of having separate corporations for the realistic purpose of limiting liability." 54 T.C. 705">Southern Dredging Corp., supra at 721. We also noted that the formation of separate entities was further motivated by the fact that a prerequisite to the sale of a former part owner's share of the business to the remaining owners was that they form separate corporations to protect his creditor's interest, a precaution readily understood in light of the fact that marine and liability insurance available was insufficient to eliminate the substantial tort risk involved. The circumstances in that case do not equate to the situation before us here. Petitioner's business is less hazardous and unpredictable than that of the taxpayer in 54 T.C. 705">Southern Dredging Corp., supra.1974 U.S. Tax Ct. LEXIS 93">*124 Tort risk in petitioner's business is not of such magnitude so that a single claim might exceed insurance coverage and jeopardize the well-being of the entire enterprise. Petitioner's business was adequately protected by insurance.

62 T.C. 331">*347 The hazards which the Colt entities faced in their construction business were similar to those encountered by the taxpayers in Aldon and Shaw. In each of those cases we rejected arguments that the need to limit various types of liability justified having multiple corporations. We reject these same contentions raised by petitioner. As we said in 33 T.C. 582">Aldon Homes, Inc., supra at 598-599:

There was little or no demonstration as to how they would operate to the economic benefit of Aldon or the alphabet corporations. Particularly is this true of the purpose to avoid the possibility of a "general claim" against the total project. We are left to surmise what the nature of such a claim might be with little to stimulate our imagination in this respect, except the reference to a suit resulting from an accident in the development of another tract. This, however, would appear to fall under the limitation of tort liability purpose. The benefits to be derived in this 1974 U.S. Tax Ct. LEXIS 93">*125 area from the use of multiple corporations are likewise unclear, particularly in view of the known custom of construction companies, as well as most businesses, to carry liability insurance, and the operation of workmen's compensation laws. The income tax returns filed by the alphabet corporations wherein deductions were claimed by each, in substantially the same amounts, for both "General" and "Workmen's Compensation" insurance, indicate they were fully protected in both respects. The stockholders already had the benefit of a "corporate shield" in Aldon, and on the evidence shown, the seeking of additional insulation through the formation of 16 more "corporate shields" was at best of minimal business significance. * * *

We also see little merit in the contention that the use of multiple corporations was necessary to facilitate the handling of mechanics' liens. As a general rule mechanics' as well as materialmen's liens, are related in time of filing and in liability to the particular building or improvement for which they are furnished, though this may be and frequently is changed by the contract or arrangement under which they are supplied. See 36 Am. Jur., Mechanics' Liens, secs. 1974 U.S. Tax Ct. LEXIS 93">*126 167-175. Here the houses were built on a mass production basis, that is, construction was initiated on lots in the first block of the subdivision and progressed lot by lot up and down the streets until the entire tract was completed. Workers moved from house to house as their phase of the work was ready to be done. Presumably materialmen's and mechanics' liens attached to the houses as completed and it is not made clear to us how the use of multiple corporations would "ease the handling of mechanics' liens" to any greater extent. * * * The recited purpose relating to the handling of mechanics' liens, as in the case of the first two enumerated purposes, was but a "make weight" factor secondary to the parties' primary objective of avoiding taxes.

Sherman testified that he regarded the multiple corporate structure as vital to avoid potential problems with subcontractors. Although his testimony is unclear, we assume that he was referring to such problems as shoddy workmanship or a subcontractor's failure to perform work on schedule. However, he did not explain why problems such as these could not just as easily be minimized by a single corporation which could limit the amount of work 1974 U.S. Tax Ct. LEXIS 93">*127 given to any single contractor. Instead, more often than not, each Colt corporation contracted with the same subcontractors to perform a major part of the work throughout the entire development. Such practice is not consistent with the purported fear of problems with subcontractors.

62 T.C. 331">*348 Petitioner raised the proposition that the use of multiple corporations might minimize the financial risks of building a residential development of the magnitude of Burnt Mills Park or Foxhall but did not explain how this result would be attained. Since the Colt corporations built homes of the same style and price in the same development, unfavorable market conditions would most likely affect all five corporations in the same manner. In addition, petitioner, Revitz, and Sherman gave personal guarantees on construction and purchase-money loans on behalf of all five corporations, so that any claim arising from financial failure of a single Colt entity would necessarily have direct financial repercussions on all Colt entities. We find that this contention lacks merit.

It is not clear that the financial risks of the enterprise were ever really transferred to the Colt entities, since there is no evidence to 1974 U.S. Tax Ct. LEXIS 93">*128 show that the Colt entities assumed total liability for the purchase price of the Burnt Mills Park and Foxhall tracts. As the findings of fact reflect, Gerasi financed the purchase of the tracts and, as far as the record shows, remained primarily liable not only on second mortgages in favor of the banks but also on first mortgages issued to the respective sellers. When the lots were transferred to or through Development to the other Colt entities, no funds were transferred to Gerasi as payment. Rather, the purchase price of the lot was simply shown in corresponding journal entries as an open account indebtedness until the lot was sold, at which time the respective Colt corporation would pay the portion of the sales price to obtain release of the seller's underlying purchase-money lien and, presumably, apply the balance to the amount owed to Gerasi. Since the brunt of liability remained on Gerasi, petitioner's multiple corporate structure did not alleviate this particular aspect of financial risk at all.

Anticipating our conclusion that the Colt entities were shams for tax purposes, petitioner submits that a finding of shamness and lack of business purpose of a liquidating corporation 1974 U.S. Tax Ct. LEXIS 93">*129 would not preclude the applicability of section 331, "provided that the distribution in liquidation was made by a corporation having separate legal existence." Petitioner does not refer us to any statute or case law to support this proposition. ^{31974 U.S. Tax Ct. LEXIS 93">*130} Contrary to petitioner's position, application 62 T.C. 331">*349 of the "sham doctrine" to the case at bar logically precludes a finding that the transactions structured as liquidations under section 331 were in fact liquidations. To explain the impact of a finding of shamness, once we determine that the five Colt entities are in reality a single corporation, we attribute all earnings from sales of homes in Burnt Mills Park and Foxhall subdivisions to the single enterprise. Since this enterprise still exists as Development and continues to carry out the business of developing residential subdivisions under the Colt name, the distributions made by it cannot qualify for treatment under section 331 within the plain wording of the statute.

If the entire transactions in the formation and use of the corporations other than Development are ignored for lack of substance, then all that has occurred here is that Development has distributed its earnings and profits to its shareholder, petitioner. It follows that this distribution is a dividend to petitioner. In our view this is the proper conclusion as to the substance of what occurred under the facts here present. ⁴ The only other 1974 U.S. Tax Ct. LEXIS 93">*131 view that might be taken of the substance of the transaction is that petitioner's acquisition of "stock" in the other Colt corporations was in substance acquisitions of additional stock in Development, and in substance petitioner received earnings and profits of the corporation in redemption of a part of his stock in the corporate enterprise so that tax treatment of the distributions would be governed by section 302. ^{51974 U.S. Tax Ct. LEXIS 93">*132 1974 U.S. Tax Ct. LEXIS 93">*133 1974 U.S. Tax Ct. LEXIS 93">*134}

62 T.C. 331">*350 Section 302(a) allows exchange treatment, and concommitant capital gains on certain categories of redemptions outlined in section 302 (b). Failure to qualify under one of the four categories set forth in section 302(b) results in amounts paid being treated as distributions of property under section 302(d) which, in conjunction with sections 301 and 316, causes the distribution to be ordinary income.

Section 302(b)(4) obviously does not apply in this case since that subsection is limited to certain railroad corporations.

Since petitioner has not terminated his interest in the Colt enterprise, he does not qualify under section 302(b)(3) for exchange treatment. Nor does the transaction fit within the confines of section 302 (b)(2) which defines substantially disproportionate redemptions of stock. This leaves for our consideration section 302(b)(1) which permits capital gain treatment 1974 U.S. Tax Ct. LEXIS 93">*135 if the redemption is not essentially equivalent to a dividend.

The determination of whether a distribution is essentially equivalent to a dividend generally depends upon the facts and circumstances of each case, but in United States v. Davis, 397 U.S. 301">397 U.S. 301 (1970), the Court stated that when a sole stockholder causes a part of his shares to be redeemed the "redemption is always 'essentially equivalent to a dividend' within the meaning of that phrase in section 302(b)(1)." In that case the Court further stated (p. 313):

If a corporation distributes property as a simple dividend, the effect is to transfer the property from the company to its shareholders without a change in the relative economic interests or rights of the stockholders. Where a redemption has that same effect, it cannot be said to have satisfied the "not essentially equivalent to a dividend" requirement of § 302(b)(1). Rather, to qualify for preferred treatment under that section, a redemption must result in a meaningful reduction62 T.C. 331">*351 of the shareholder's proportionate interest in the corporation. * * * [Emphasis supplied.]

Clearly, the petitioner's redemption of part of his stock in the Colt enterprises would not qualify 1974 U.S. Tax Ct. LEXIS 93">*136 under the holding in Davis since it would not be not essentially equivalent to a dividend. After the redemption, petitioner was the sole shareholder in the Colt enterprise. Therefore if the distribution to petitioner is viewed as a redemption of part of his stock in the Colt enterprise, section 302(d) imposes ordinary income treatment on amounts distributed to petitioner.

Because certain issues have been disposed of by agreement of the parties,

Decision will be entered until Rule 155.