69 T.C. 689">*690 OPINION

The Commissioner determined a deficiency of $ 53,903 in petitioners' joint Federal income tax for the calendar year 1970.

The issue posed is one of first impression. It is whether1978 U.S. Tax Ct. LEXIS 180">*182 the incorporation of a sole proprietorship causes a cessation of the trade or business of the individual proprietors within the meaning of Rev. Proc. 67-10, 1967-1 C.B. 585, as amplified by Rev. Proc. 70-16, 1970-1 C.B. 441, so as to require the inclusion of the balance of the section 481¹ adjustment as income in the year of incorporation.

All of the facts have been stipulated. The stipulation of facts along with attached exhibits are incorporated herein by this reference.

Petitioners Dean R. Shore and Wilma V. Shore, husband and wife, resided in Fresno, Calif., at the time of filing their petition herein. They filed a joint Federal income tax return for the calendar year 1970 with the District Director of Internal Revenue for the Northern District of California.

From 1961 to July 16, 1970, petitioners owned and operated1978 U.S. Tax Ct. LEXIS 180">*183 Shore Acoustical & Insulation Co., a sole proprietorship engaged in the acoustical and insulation contracting business. In the taxable year ending December 31, 1968, petitioners changed their overall method of accounting from the cash receipts and disbursements method to the accrual method in accordance with Rev. Proc. 67-10, supra, as amplified by Rev. Proc. 70-16, supra. As a result of said change, the sole proprietorship realized a net adjustment (increase) in income under section 481 of $ 142,994.43 for the year 1968. However, in accordance with the above cited revenue procedures, petitioners were only required to report one-tenth of this amount ($ 14,299) for the year 1968 and a like amount in each of the following 9 years.

69 T.C. 689">*691 On July 16, 1970, petitioners incorporated their sole proprietorship in a tax-free transfer under section 351 to form Dean R. Shore, Inc. One hundred percent of the stock of Dean R. Shore, Inc., was issued to petitioners in exchange for their transfer of the net assets of Shore Acoustical & Insulation Co. From the time of incorporation to the present 1978 U.S. Tax Ct. LEXIS 180">*184 the former business of the proprietorship has been operated by the corporation.

Mr. Shore has continued as president and chief operating officer of the corporation since its incorporation in 1970. Petitioners have continued to own 100 percent of the stock of the corporation since that time and the corporation is neither a partner nor a joint venturer in any other business. Petitioners have not engaged in the acoustical and insulation contracting business as individuals since the incorporation of Dean R. Shore, Inc. They have continued to report one-tenth of the adjustment on their individual returns during the period subsequent to incorporation.

The question presented is whether incorporation of a sole proprietorship causes a cessation of the business of the sole proprietors within the meaning of Rev. Proc. 67-10, supra, as amplified by Rev. Proc. 70-16, supra, ² so as to require them to report as income the balance of the section 481 adjustment (that portion not previously taken into account as income) in the year of incorporation.

1978 U.S. Tax Ct. LEXIS 180">*185 Rev. Proc. 67-10, supra, as amplified by Rev. Proc. 70-16, supra, 1970-1 C.B. at 441 --

provides an administrative procedure whereby taxpayers may expeditiously obtain consent to change their overall method of accounting from the cash receipts and disbursements method to an accrual method for Federal income tax purposes. Taxpayers complying with the provisions hereof will be deemed to have obtained the consent of the Commissioner of Internal Revenue to change their method of accounting.

One of the conditions for utilizing this administrative procedure is --

A taxpayer who has changed his method of accounting under the provisions of Revenue Procedure 67-10 and ceased to engage in a trade or business (otherwise than in a transaction to which section 381 of the Code applies) 69 T.C. 689">*692 during the ten-year period over which the adjustment is to be spread must attach a statement to the Form 3115 filed with the return for the taxable year in which he ceased to engage in a trade or business showing the balance 1978 U.S. Tax Ct. LEXIS 180">*186 of the adjustment not previously taken into account in computing taxable income as the portion of the adjustment to be taken into account in that year. [Rev. Proc. 70-16, supra, 1970-1 C.B. at 442.]

The Commissioner is granted the authority to prescribe such conditions under sections 446(e) and 481(c). See sec. 1.481-5, Income Tax Regs.

Petitioner makes several arguments in support of his position that the adjustment amount should not be triggered as income in the year of incorporation. First, he argues that he did not cease to engage in a trade or business. He also argues that to require reporting the adjustment amount at the time of the incorporation transaction would subvert the policy of section 351 which is designed to facilitate the incorporation of an on-going business.

Respondent counters by contending that petitioner ignores the change inherent in the incorporation of an unincorporated entity and that petitioners, by incorporating, ceased to engage in the acoustical and insulation business.

Initially, we must deal with those cases on which the parties focused their attention. This1978 U.S. Tax Ct. LEXIS 180">*187 group of cases, Hempt Bros., Inc. v. United States, 490 F.2d 1172">490 F.2d 1172 (3d Cir. 1974), cert. denied 419 U.S. 826">419 U.S. 826 (1974); Dearborn Gage Co. v. Commissioner, 48 T.C. 190">48 T.C. 190 (1967); Ezo Products Co. v. Commissioner, 37 T.C. 385">37 T.C. 385 (1961); Pittsfield Coal & Oil Co. v. Commissioner, T.C. Memo. 1966-4, holds that for purposes of section 481 the incorporation of a sole proprietorship creates a new taxpayer, the corporation. While this line of cases supports the proposition that a corporation is distinct from the proprietorship from which it was created, it does not necessarily follow that petitioners ceased to engage in the acoustical and insulation business when it was placed in corporate form.

However, it has long been held that --

A corporation and its stockholders are generally to be treated as separate entities. Only under exceptional circumstances * * * can the difference be disregarded. [Burnet v. Clark, 287 U.S. 410">287 U.S. 410, 287 U.S. 410">415 (1932). See also Moline Properties v. Commissioner, 319 U.S. 436">319 U.S. 436 (1943).]

1978 U.S. Tax Ct. LEXIS 180">*188

As a result, on incorporation in 1970, petitioners placed what had 69 T.C. 689">*693 been their trade or business into a separate entity whose trade or business could in no way be imputed to them. ³1978 U.S. Tax Ct. LEXIS 180">*189 Thus, on incorporation they ceased being engaged in the acoustical and insulation business as individuals ⁴ and as a result, under the terms of the revenue procedures, must bring into income the balance of the section 481 adjustment in the year of incorporation. ⁵

1978 U.S. Tax Ct. LEXIS 180">*190 Decision will be entered for the respondent.