Trico Sec. Corp. v. Commissioner

TRICO SECURITIES CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Trico Sec. Corp. v. Commissioner Docket No. 85176. United States Board of Tax Appeals 41 B.T.A. 306; 1940 BTA LEXIS 1200; February 13, 1940, Promulgated *1200 The taxpayer is not subject to tax under section 104 of the Revenue Act of 1932, since it was not formed nor was it availed of in 1933 for the purpose of preventing the imposition of surtax upon its shareholders through the medium of permitting its gains and profits to be accumulated instead of being divided or distributed. John Lord O'Brian, Esq., and Ralph Ulsh, Ewq., for the petitioner. Allen T. Akin, Esq., for the respondent. LEECH *306 This is a proceeding to redetermine a deficiency in income tax of $106,999.45 for the calendar year 1933. The only question for decision is whether petitioner is subject to the tax under section 104 of the Revenue Act of 1932 on the ground that it was formed and/or availed of for the purpose of preventing the imposition of the surtax on its shareholders through the medium of permitting its gains and profits to accumulate instead of being divided or distributed. FINDINGS OF FACT. Petitioner is a corporation, organized in 1929 under the laws of the State of Delaware. Its charter authorized it to acquire, own, hold, manage, sell, and exchange the stocks, bonds, obligations, and any kind of securities*1201 of any corporation, to investigate the condition, value, and prospects of any business concern, to acquire, own, use, develop, and sell letters patent, to borrow money and issue bonds, and to purchase, hold, and sell its own capital stock. It was also authorized to issue 400,000 shares of capital stock without par value *307 Petitioner was organized by the 21 original stockholders of the Trico Products Corporation (hereinafter referred to as "Trico"), which was engaged in the manufacture of windshield wipers and other automobile accessories at Buffalo, New York. On September 1, 1927, Trico entered into an agreement with its stockholders and certain bankers. The substance of the agreement was that after the financial structure of Trico had been changed to provide that Trico should have only common stock in the amount of 675,000 shares without par value, the stockholders agreed to waive dividends up to $2.50 per share on 450,000 shares (hereinafter referred to as "restricted stock") and the bankers agreed to buy, at a specified price, 175,000 shares which should be free of dividend restrictions. The remaining 50,000 unrestricted shares were to be distributed ratably to*1202 the stockholders. The stockholders further agreed to place their 450,000 restricted shares in a voting trust, the trustees of which were John R. Oishei, Peter C. Cornell, H. S. Evans, Charles H. Oishei, and W. P. Haines, stockholders in Trico. Evans was designated as syndicate manager. His duties were to represent the stockholders in the exchange of old stock certificates for the new issue, to transfer the 175,000 shares to the bankers, and to deposit the stockholders' new certificates in the voting trust. The details of the waiver of dividends on the restricted shares were these. In any year in which earnings warranted the payment of dividends, $2.50 per share would be paid on the 225,000 free shares, without any payment on the 450,000 restricted shares. Any dividends declarable and payable in excess of $2.50 were to be declared and paid ratably on the entire 675,000 shares. On January 1, 1928, and annually thereafter, not in excess of 112,500 restricted shares might be freed from restriction accordingly as the net earnings of Trico for 1927, or any succeeding year, should be equal to $5 per share upon the sum of free shares then outstanding plus the number of shares then*1203 released from restriction. On January 1, 1929, and annually thereafter, additional restricted shares not in excess of 112,500 might be similarly freed, provided the net earnings for 1928, or any succeeding year, were equal to $6 per share on the sum of free shares plus the additional shares then released. Thereafter the remaining 225,000 shares might be similarly freed, provided the net earnings equaled $9 per share, etc. The voting trust was created both because the bankers requested it and because it was desired that the control of Trico and the formulation of its policies should be kept in the hands of its then management. It was to have a duration of 10 years. Whenever restricted shares were freed, by reason of increased earnings, they would be released from the voting trust and delivered to their owners. The plan was thereafter placed in operation. *308 On November of 1929, 112,500 shares of restricted stock had been exchanged for free stock, leaving only 337,500 shares of restricted stock remaining in the voting trust. Constituting exactly 50 percent of the total outstanding stock of Trico, this block gave the voting trustee not more than practical control*1204 of the corporation. The principal stockholders were now faced with two dangers. First, there was the risk of losing that control of Trico in case any more shares should be freed from the voting trust. Second, the newly freed shares might be thrown on the market and tend to depreciate or, at least, prevent appreciation of the market value of Trico stock, which was then listed on the New York Stock Exchange. The possibility of an adverse effect on the market caused concern to the brokers and bankers who had been handling the resale of the 175,000 shares of Trico. They requested those in control of petitioner "to do something" about the situation. In order to continue the control of Trico by its existing management and to prevent newly freed stock from being thrown on the market, petitioner was organized. It issued 337,500 shares of its stock in exchange for the 337,500 restricted shares of Trico which still remained in the voting trust. Each stockholder owning restricted stock gave Evans a power of attorney to effectuate the exchange, with the understanding that, except for 1,000 shares to be issued at $10 each for organization expenses, petitioner would issue no shares except*1205 in exchange, share for share, for the restricted stock of Trico. At the time of the organization of petitioner the possibility of avoiding surtax on shareholders through the medium of permitting gains and profits to accumulate was not discussed by any of the parties concerned. The sole source of petitioner's income, at the outset, consisted of dividends on the Trico stock as it was released from the restrictions. It was then intended that petitioner would redistribute these dividends to its shareholders as it received them. In March 1930, 37,491 shares of Trico stock, owned by petitioner, were released from dividend restrictions. This was the only restricted stock released from dividend restrictions from the time of petitioner's incorporation until 1936. After 1930, petitioner's income consisted of dividends on this released Trico stock, augmented by dividends on additional unrestricted Trico stock purchased by petitioner and by peofits realized by trading in Trico stock on the open market. Following the stock market crash of 1929, the stock of Trico, which in July of that year had reached a high of $63, declined to $30. As a result the stockholders of petitioner, including*1206 certain valued employees, were faced with financial ruin, for many of them had *309 pledged Trico stock as collateral on loans and margin accounts. The stock of Trico was without sponsorship in the market or responsible support. Petitioner received, in the early part of 1930, many requests and importunities from shareholders and brokers to take steps to prevent the decline of Trico stock to a point that would be ruinous. Because of this situation, petitioner decided to abandon its relatively quiescent role of holding the practically controlling stock interest in Trico and to engage in buying and selling Trico stock in order to make and support a market therefor. The strategy was to buy on the declines and to sell on the rises, both to stabilize the price around $30 and to acquire capital with which to engage in such further supporting operations as might be necessary. The decision to undertake these activities was made by Oishei, Cornell, Evans, Harris, and Tully, who were directors of both Trico and petitioner and the largest stockholders of both. Evans was in direct charge of market activities, but consulted frequently with the others and with brokers in New York. *1207 Commencing with March 20, 1930, petitioner bought and sold shares of Trico on the open market, mainly in 100-share lots. There was no purpose to accumulate Trico stock. Petitioner sold as many shares as a rising market would absorb, and bought only on declines, especially when the stock went under $30. The following table summarizes petitioner's operations in 1933, the taxable year. Market quotations [1933] Shares bought Shares sold High Low January [200] 21 5/8 20 3/4 February 2,000 [21] 20 1/4 March [500] 23 3/4 20 1/8 April [300] 1,700 25 3/4 21 3/4 May 1,600 8,500 32 1/4 24 7/8 June 2,600 6,100 37 3/8 32 3/8 July 3,200 2,200 [28] August No purchases 1,000 34 1/4 30 1/4 September No purchases No sales 35 3/4 [32] October 1,700 No sales 32 1/2 26 1/4 November-December No purchases [600] 35 1/4 26 1/2 Petitioner's total purchases and sales, and the percentage thereof to the total transactions in Trico stock on the market, from 1930 to 1934, were as follows: Year Bought Sold Percentage of total transactions on market [1930] 32,610 9,500 30.6 [1931] 27,700 26,097 23.7 [1932] 18,821 12,600 [1933] 12,200 21,000 20.1 [1934] 4,300 6,665 17.8 *1208 *310 These activities, expressed in dollars, were as follows: Year Bought Sold Profit Loss [1930] $1,160,476.16 $328,550.50 $8,732.00 [1931] 854,120.00 856,885.62 $22,576.19 [1932] 451,798.18 330,754.50 4,498.00 [1933] 357,652.50 655,778.46 81,943.67 [1934] 160,070.00 247,918.50 65,157.75 The inventory of Trico stock on hand at the end of each year was as follows: Year Number shares Net cost [1930] 23,110 $831,925.66 [1931] 24,713 829,160.04 [1932] 30,934 950,203.72 [1933] 1 22,134 652,077.76 [1934] 19,769 564,229.26 The average purchase and sales prices and market ranges were as follows: Year High Low Average purchase price Average selling price [1930] $41 3/4 $25 1/4 $35.5 plus $34,5 plus [1931] 45 5/8 [24] 30.8 plus 32.8 plus [1932] 31 3/4 19 3/8 24. plus 26.2 plus [38] 20 1/8 29.4 plus 31.2 plus [1934] 40 7/8 [33] 37.2 plus 37.2 plus Petitioner discontinued buying and selling Trico stock in 1934 and paid its brokerage accounts*1209 soon thereafter. There remained in its hands then, 19,769 shares of Trico stock which were not purchased as an investment but as a part of petitioner's trading activities. In early 1929, Trico had bought a number of shares of its own stock because of an advantageous price. However, it developed that earnings of Trico were lessened because of the money invested in this treasury stock, thus preventing release of the restricted Trico stock from dividend restrictions. To increase Trico earnings and hasten the release of its stock from those restrictions, shortly prior to its commencement of support operations on the open market, petitioner decided to buy this stock for what it had cost Trico. The purchase was consummated on March 14, 1930, petitioner paying a total of $316,794.75 for 6,710 shares of Trico stock. This was a price of between $8 and $9 per share above the then market price of the stock. Having no funds of its own, petitioner gave Trico a note for *311 the stock, which was pledged as collateral to the note. The dividends on the stock were used to defray the interest accruing on the note. Petitioner thereafter carried this block of stock in its investment*1210 account, while stock acquired in open market operations was carried in its trading account. Petitioner financed its initial market operations by borrowing money from Trico, and on December 1, 1930, it owed Trico over $600,000. It then proceeded to establish lines of credit of $300,000 each, at two banks. It then borrowed $300,000 from one of these banks, the Manufacturers & Traders Trust Co. of Buffalo, New York. For this, petitioner gave its unsecured, interest-bearing demand note and agreed not to pay any dividends until the loan had been paid. A second loan was then made from the other bank, the Marine Trust Co. of Buffalo, New York, in the amount of $300,000. For this, petitioner gave its three-month interest-bearing collateral note, secured by a pledge of 20,000 free shares of Trico, and agreed not to pay any dividends until the loan had been paid. In the case of both loans the agreement not to pay dividends was a condition imposed by the banks. Petitioner applied the proceeds of these loans on its indebtedness to Trico, and at the close of 1930 it owed the two banks $600,000 and Trico $69,321.97. Petitioner reduced the first loan as follows: [1931] $100,000 [1932] 25,000 January 11, 1933 10,000 *1211 On March 31, 1933, at a time when it owed the Manufacturers & Traders Trust Co. $165,000, petitioner contracted an additional loan of $115,000 from the same source. As of December 31, 1933, it still owed this bank $114,000. Petitioner also made payments on the second loan. On January 1, 1933, there was still unpaid the sum of $223,000. At the request of the Marine Trust Co. the loan was reduced on March 31, 1933, by a payment of $163,000. The proceeds of the new loan from the Manufacturers & Traders Trust Co. were used in this reduction. The collateral to the curtailed loan was then reduced to 8,000 shares of Trico stock. At the close of 1933, petitioner still owed the Marine Trust Co. $25,000. In addition, petitioner borrowed additional amounts from brokers and individuals to finance its operations. On a loan of $150,000 and another of $100,000 from two of its large stockholders, petitioner paid interest of 6 percent. Its total annual indebtedness on all these loans was as follows: December 31, 1930 $788,288.35 December 31, 1931 872,567.90 December 31, 1932 869,364.49 December 31, 1933 438,608.31 *312 Thus, during the four years from*1212 1930 to 1933, petitioner borrowed an aggregate of $2,307,900.46 and repaid $2,100,668.97, exclusive of amounts owing brokers on margin accounts. These loans were all used for the purpose of supporting the market for Trico stock. Petitioner's gross income in those years was as follows: Dividends Interest Profit on sale of stock [1930] $88,126.89 $106.84 [1931] 181,065.65 653.45 $22,576.19 [1932] 159,860.66 4,068.14 [1933] 156,265.44 4,190.05 82,151.27 The item of dividends includes dividends received on original holdings as they were released from restrictions and dividends on stock acquired in open market operations. Petitioner's cash on hand at the close of 1932 was $307.01; and at the close of 1933 it was $19,949.11. Petitioner's net income 1 was as follows: [1930] $49,388.74 [1931] 169,266.01 [1932] 121,080.76 [1933] 213,998.89 Petitioner's surplus at the end of each of those years was as follows: [1930] $49,388.74 [1931] 218,654.75 [1932] 339,735.51 [1933] 540,134.79 Petitioner loaned a total of $33,000*1213 to Evans, who was one of its principal stockholders, and about $50,000 to Charles Oishei, another of its principal stockholders, who were also individually supporting the market in Trico stock. These loans were made to avoid the sale of Trico stock held by brokers on margin accounts for these stockholders. The loans bore interest at 5 percent and were secured by this Trico stock. At the close of 1933, $65,548.46 was still owing thereon. *313 Petitioner paid no dividends until 1935, after it had ceased market operations and liquidated its indebtedness. Thereafter it distributed all the dividend income that it received. The additional surtax liability that would have accrued to the principal stockholders of petitioner in 1930, had dividends on Trico stock held by petitioner been distributed, would have been as follows: Stockholder Number of shares Surtax Peter C. Cornell 90,347 None John R. Oishei 99,012 $5,584.11 S. H. Evans 38,621 1,600.96 Charles H. Oishei 32,014 None Ieuan Harris 16,757 292.12 Estate of William J. Tully 9,698 None The total amount avoided by all stockholders was $7,647.44. The additional surtax liability*1214 in 1933 would have been as follows: Stockholder Surtax Peter C. Cornell $21,701.88 John R. Oishei 25,375.31 S. H. Evans 6,001.89 Charles H. Oishei 2,979.37 Ieuan Harris 1,269.07 Estate of William J. Tully 11.48 The total amount avoided by all stockholders was $57,579.20. The following items were purchased by petitioner from John R. Oishei, a stockholder of petitioner, to enable him to deduct losses for tax purposes, and were resold to him by the petitioner: Stock Purchase date Purchase price Sale date Selling price 7,653 shares Niagara Shares, Inc December 1931 $18,558.53 February 1932 $18,276.23 16,000 shares Detroit Bridge Co December 1932 380.00 February 1933 453.60 40,000 shares Lautaro Nitrate Co December 1932 1,000.00 February 1933 1,134.00 Petitioner was formed originally as a mere holding company, to retain control of the management of Trico in the hands of the latter's original stockholders and to prevent free Trico stock from coming on the market in large quantities. Petitioner's gains and profits were not accumulated in 1933 beyond the reasonable needs of its business. Petitioner*1215 was not organized nor was it availed of in 1933 for the purpose of preventing the imposition of the surtax on its shareholders through the medium of permitting its gains and profits to accumulate rather than allowing them to be divided or distributed. *314 OPINION. LEECH: The first question is whether petitioner was formed for the purpose of avoiding the surtax on its shareholders through the medium of permitting its gains and profits to be accumulated instead of being divided or distributed. It has been found, as a fact, that petitioner was organized as a mere holding or investment company. From this fact the presumption arises that the condemned purpose existed at its organization. Revenue Act of 1932, sec. 104(b). However, this presumption is rebuttable and, in our judgment, has been conclusively overcome here. The witnesses of petitioner testified that avoidance of surtax was neither discussed nor entertained as a motive by anyone concerned at the time of its organization. This testimony was neither shaken nor contradicted on cross-examination. While this testimony is certainly not conclusive as to the nonexistence of the interdicted purpose (*1216 , and ), nevertheless it is entitled to weight if there is corroborating evidence. ; affd., ; certiorari denied, ; . In our opinion, such evidence exists here. Fifty percent of the total outstanding stock of Trico, in November 1929, had been released from the restrictions of both the voting trust and the waiver of dividends. The voting trustee retained only the barest practical control of Trico and, consequently, its policies and management. But, the proscribed intent may not be inferred from an intent to concentrate and maintain control of the corporation, without more. ; affd., . Moreover, when a block of stock was released from its restrictions, there was a danger that it would be dumped on the market, thus driving the price down or at least preventing a rise. That petitioner may have been organized for the additional purpose of avoiding*1217 any such adverse effect on the market value of Trico stock, under the present circumstances, is wholly reasonable and just as proper. Cf. . The only asset that was intended to be acquired and that was acquired by petitioner upon its organization, was this stock of Trico, which was then producing no income. Under the circumstances, in all probability, no income would arise from holding such stock and comparatively little could have been reasonably expected in the foreseeable future from such of that stock as would be released from restrictions. The intent thus evidenced, though consistent with the purpose of retaining control and protecting the market value of Trico stock, is *315 inconsistent with any intent to accumulate gains and profits in order to avoid surtax. Respondent suggests that, since 1930 surtax was avoided in fact, because petitioner's dividend income in that year was used for corporate purposes, instead of being distributed, those in control of petitioner must have intended, "as keen American business men", this particular consequence. This contention is sufficiently answered by *1218 ,, and , wherein the Board held that the prohibited purpose, upon which, alone, the imposition of the tax can depend, is not established by avoidance of surtax per se. Moreover, the amount of surtax avoided in 1930 by stockholders of petitioner was trivial in amount when compared with the magnitude of petitioner, the capital employed, and the risk to such capital in the operations being carried on to stabilize the market. In that year, a total amount of $7,647.44 in surtax was avoided by three of petitioner's 23 stockholders through petitioner's earnings for that year not being distributed. As to the other 20 stockholders, there is no evidence of a saving. Such a condition does not support a theory of a purpose to avoid surtax in the organization of petitioner. Common sence teaches us that it is unreasonable to assume that 21 "keen American business men" would borrow and risk some $600,000 in operations on the market to effect a saving of a tax liability of less than $8,000 to three of their number. Accordingly, *1219 we have found that petitioner was not formed for the interdicted purpose. Was petitioner availed of, in 1933, the taxable year, for the purpose penalized under section 104? The reason for the creation of petitioner was to hold, in one unit, 50 percent of the stock of Trico. Admittedly, petitioner made an investment in 6,710 shares of Trico in March of 1930. But this was done in order to free such of Trico's moneys as were tied up in that treasury stock and make those funds available for production of earnings. And, the evidence is clear and overwhelming that from 1930 onward, petitioner's function was to create and support a market for Trico stock. More fully set out in our findings, it shows that, from 1930 to 1934, substantial percentages of the total volume of trading in Trico on the New York Stock Exchange were due to petitioner's market activities. In 1933, petitioner accounted for 20.1 percent of the total volume, buying 12,200 shares and selling 21,000 in 100-share lots. Expressed in dollars, the 1933 purchases totaled $357,652.50, and the 1933 sales aggregated $655,778.46. In prior years, petitioner's supporting activities were even greater, rising in 1932 to 67*1220 percent of all market transactions in Trico. These operations undoubtedly *316 stabilized the price of Trico stock and aided in lessening its decline through the course of the depression. There is no indication of trading for profit per se. No more than reasonable stabilization was effected. When that was accomplished, the operations ceased, the corporate debts were paid, and, thereafter, the dividends received on its remaining Trico stock were distributed. The business reason motivating this extraordinary activity of petitioner was to prevent, as far as possible, depreciation in the market value of Trico stock. Many of the stockholders of Trico had pledged this stock as collateral on loans and margin accounts; should that collateral decline too far, their financial ruin was inevitable. Moreover, all of petitioner's capital consisted of Trico stock. Although it must have been hoped that a profit on these protective trading transactions would be made, it is strongly indicated that their only purpose was to create and support a market for Trico stock. See *1221 ; affd., ; certiorari denied, ; ; affd., . That, among those facing catastrophe were the persons responsible for petitioner's organization and market activity, or that the motives of that activity were ultimately selfish in the sense that they were for the protection of the market value of Trico stock in which many of petitioner's stockholders were not only vitally interested but upon the maintenance of which value their economic lives and that of petitioner depended, does not affect the validity of or the need for the market operations carried on by petitioner. Cf. Such a motive is not that which the statute condemns. However, we have made no finding as to whether petitioner was a mere holding or investment company in the taxable year 1933, because, even if it were so designated, the statutory presumption thus raised (Revenue Act of 1932, sec. 104(b)), is, we think, conclusively overcome by the evidence. *1222 The business need, not only for the use of all of petitioner's gains and profits but also its large borrowings in its market activities, is amply demonstrated, and contradicts the existence of the proscribed purpose. ; In the years prior to 1933, petitioner had losses in its trading activities in two years and a small profit in one. In 1932 its market operations resulted in a loss. In 1933, purchases totaled $357,652.50 and sales were in the amount of $655,778.46. The income from Trico dividends in 1933 was $156,265.44. The book surplus, as of the close of 1932, was $339,735.51. This surplus was composed mainly of Trico stock acquired in the course of trading. At the beginning of 1933, petitioner owed $869,364.49 on loans which it had contracted in order *317 to finance its market operations. It had agreed with two banks that it would not pay dividends until it had fully repaid loans which they had made to it. Such loans were still outstanding in substantial amounts in 1933. Faced with the necessity for reducing outstanding obligations and with a need for operating capital, the*1223 requisite amount of which could not be estimated in advance, petitioner could not reasonably have paid out anything in dividends in 1933. To have done so would not only have violated two agreements with the banks and have required a new loan, but, obviously, would have been an act of financial folly, under the circumstances. A corporation certainly need not increase its indebtedness, merely to avoid the application of section 104, when the reasonably possible consequence of such increase would be its economic injury or death. See , and Respondent bases his argument that petitioner was availed of in 1933 for the purpose of preventing imposition of surtax on its shareholders, by his analysis of petitioner's balance sheet for that and preceding years and on certain isolated acts in prior years in which some of its then accumulated surplus was used to extend relief to some of its large stockholders in carrying Trico stock owned by them, and by purchasing and holding, for a short period, securities which they wished to sell to realize individual losses for tax purposes. Respondent thus relies*1224 upon his analysis and reconciliation of surplus as establishing that petitioner received substantial income in each year, from 1930 to and including 1933, and that an increasing surplus existed at the close of each successive year, which amounted to $540,134.79 at the close of 1933. Upon this basis it is urged that petitioner was well able to distribute the earnings of $213,998.89 realized in that year, the retention and use of which earnings, it is said, were not necessary in the operation of its business. As establishing the fact that a large part of such surplus was not necessary, respondent points to an item on the balance sheet for 1933, showing $100,000 represented in securities carried "for others" and $65,548.46 outstanding on loans made to two of its large stockholders. In addition to this it is contended that the balance of the existing surplus and a large part of its borrowings were merely invested in stocks and that these funds were thus accumulated in that form. It is then argued that if petitioner had surplus to invest or to loan to others it was available for dividend distribution instead. If petitioner had no business purpose during 1933, beyond the mere purchase*1225 and holding of securities for investment, respondent's argument would undoubtedly be sound. But petitioner's *318 purpose was not so limited in 1933, nor had it been since 1930. In our opinion, the evidence is compelling that this purpose was to create and support a market for Trico stock. Having in mind that purpose and the activity of the petitioner during those years in effectuating such purpose, the conclusion is inescapable that these acts which respondent contends are consistent, only, with the intent prohibited in section 104, are, in fact, either inconsequential in the total picture or are, not only consistent with but reasonably necessary in carrying out the established purpose of creating and supporting a market in Trico stock. Thus, the use of $100,000 in carrying Trico stock in brokerage accounts for others was as reasonable as the expenditure by petitioner of a larger sum in the purchase of such stock which would probably have been necessary had the stock been thrown on the market. The loans to two stockholders engaged in buying Trico stock and assisting in the support petitioner was giving the market, were in definite*1226 furtherance of that purpose. And, in view of the proof, we can not agree with respondent's contention that any of the Trico stock acquired and held by petitioner was a mere investment rather than a purchase made with the view of stabilizing the market and with the purpose to resell it as the market strengthened and could absorb it. The three purchases of securities by petitioner in prior years to permit a stockholder to take a loss for income tax purposes, we think, are of no consequence here. In each instance the stock was resold at purchase price in slightly over 30 days. Both the number of such transactions and funds involved, when compared to the total trading and amounts so used, contradict any possible pertinent significance in them in this proceeding. Petitioner centered the year 1933, engaged actively in effectuating its plan of supporting the market for Trico stock. It then had an indebtedness of $869,364.49, incurred in furnishing that support. During that year, it realized a net income of $213,998.89 and closed the year with a book surplus of $540,134.79. But, during that period, it paid $430,756.18 on account of its indebtedness. This payment was more than*1227 twice the amount of its net income for the year and, at the close of the year, its cash on hand amounted to only $19,949.11. The book surplus was represented by Trico stock bought to stabilize a weak market. Had petitioner paid a dividend at the close of 1933, it would have been forced to borrow the money to do so or, as respondent contends, sell Trico stock. The use of either such alternative was, in our judgment, impractical here. In view of then market conditions, it seems apparent that the potential needs of petitioner's business in the taxable year might reasonably require *319 the use of all of its credit and thus bar any use of that credit for dividend purposes. And such suggested sale of Trico stock by petitioner would have defeated the very purpose of petitioner's then existence and precipitated a condition, the result of which might well have been the elimination of profits and accumulated surplus as well. See . In addition, it may be noted that the payment of a dividend would have violated the agreements not to pay dividends, made by the petitioner with the two banks as conditions for the advancement*1228 of credits. These conditions were reasonable and were imposed on petitioner by the banks. The credits were not merely two specific loans of $300,000 each, but were two "lines of credit" in that amount. Thus, though one of the loans had been substantially curtailed by 1933, and the balance was therefore more readily payable, a violation of the agreements might well have entailed a loss of the entire lines of credit. The activities of petitioner in supporting the market were not yet ended. Such further support might reasonably have necessitated further loans. We have therefore found as a fact that petitioner was not availed of in 1933 for the purpose of preventing imposition of the surtax on its shareholders through the medium of permitting its gains and profits to accumulate. In view of this conclusion, it is unnecessary to pass on petitioner's argument that the statute can not constitutionally apply because only some and not all of its stockholders actually avoided surtax. Reviewed by the Board. Decision will be entered for the petitioner. Footnotes 1. Of the 22,134 shares on hand at the close of 1933, 11,400 were pledged with brokers and the remainder were owned outright. ↩ 1. Gross income less interest, taxes, miscellaneous, losses on sales of stock, and bad debts. ↩