tankers, and the ultimate sale of National stock to United Tanker
Corporation were merely steps in a transaction designed as a sale
of the tankers by AOTC to United at a profit to AOTC of
$450,000; hence, the distribution of that amount to National stock-
holders, petitioners herein, was in effect a dividend to them from
AOTC.

2. Held, further, that United's promissory note was intended
merely as evidence of its indebtedness to petitioners and, therefore,
that amounts paid pursuant to the terms of the note were includible
in petitioners' income only when distributed to them.

George E. Cleary, Esq., for the petitioners.

Ellyne E. Strickland, Esq., for the respondent.

These proceedings, which have been consolidated for trial and decision, involve deficiencies in income tax determined against the petitioners as follows:

In Docket No. 62571 petitioners allege there was an overpayment of $2,850 for the year 1949 and claim a refund therefor.

The questions for decision are: (1) Whether petitioners realized long-term capital gains in 1948 and 1949 upon the purported sale of their stock in National Tanker Corporation to United Tanker Corporation for $450,000, or whether such amount in fact represented dividends received from American Overseas Tanker Corporation; (2) in the alternative, if the deferred payments of $450,000 were dividends and therefore taxable as ordinary income, whether that portion of the payments received in 1949 is properly includible in income for 1949 or for 1948.

FINDINGS OF FACT.

Petitioner Virginia W. Stettinius Dudley (Docket No. 62570) and her husband, Edward R. Stettinius, Jr. (now deceased), filed joint

income tax returns for 1948 and 1949 with the collector of internal revenue at Richmond, Virginia. Petitioners William F. Halsey and Frances G. Halsey (Docket No. 63536), husband and wife, also filed a joint income tax return for 1948 with the collector of internal revenue at Richmond, Virginia.

Petitioners Julius C. Holmes and Henrietta A. Holmes (Docket No. 62571), husband and wife, filed joint income tax returns for 1948 and 1949 with the collector of internal revenue at Baltimore, Maryland.

Petitioners William E. Dobson and Thelma S. Dobson (Docket No. 63143), John C. Ennis and Theresa M. Ennis (Docket No. 63531), Fred Barrett and Anne Barrett (Docket No. 63532), Roland T. Reid and Mae V. Reid (Docket No. 63537), and Charles Bosak and Aloyse M. Bosak (Docket No. 63714), husbands and wives, respectively, filed joint income tax returns for 1948 with the collector of internal revenue, first New York district, Brooklyn, New York. Petitioner Helen Wandelt and her husband, Frederick H. Wandelt (now deceased) (Docket No. 63148), and petitioner M. Lorraine Schmitt and her husband, Frank J. Schmitt (now deceased) (Docket No. 63916), also filed joint returns for 1948 with the collector of internal revenue, first New York district, Brooklyn, New York. The estates of Frederick H. Wandelt and Frank J. Schmitt are represented, respectively, by John P. Maguire as executor and M. Lorraine Schmitt as administratrix.

Petitioner John P. Maguire (Docket No. 63144) filed an individual income tax return for 1948 with the collector of internal revenue, fifth New Jersey district, Newark, New Jersey. Petitioners F. Willard Bergen and Hazel W. Bergen (Docket No. 63529), and Harold J. Maass and Isabel Maass (Docket No. 63530), husbands and wives, respectively, filed joint income tax returns for 1948 with the collector of internal revenue, fifth New Jersey district, Newark, New Jersey.

Petitioners E. Stanley Klein and Elizabeth M. Klein (Docket No. 63145) and petitioners Tracy D. Pratt and Marilyn K. Pratt (Docket No. 63147), husbands and wives, respectively, filed joint income tax returns for 1948 with the collector of internal revenue, third New York district, New York, New York. Petitioner George D. Hawthorne (Docket No. 63915) filed an individual income tax return for 1948 with the collector of internal revenue, third New York district, New York, New York.

Petitioners Arthur M. Klein and Ethelyn L. Klein (Docket No. 83146), and William J. Hawthorne and Beatrice J. Hawthorne (Docket No. 63715), husbands and wives, respectively, filed joint income tax returns for 1948 with the collector of internal revenue, fourteenth New York district, Albany, New York.

Petitioner Frank A. Dwyer (Docket No. 63533) filed an individual income tax return for 1948 with the collector of internal revenue, second New York district, New York, New York. Petitioners William N. Westerlund and Lyn B. Westerlund (Docket No. 63534), John Ellis Knowles and Marion B. Knowles (Docket No. 63535), and Frank M. Bynum and Elbee A. Bynum (Docket No. 63713), husbands and wives, respectively, filed joint income tax returns for 1948 with the collector of internal revenue, second district of New York, New York, New York.

Virginia W. Stettinius Dudley, Henrietta A. Holmes, William E. Dobson, Ethelyn L. Klein, Tracy D. Pratt, Helen Wandelt, Hazel W. Bergen, Isabel Maass, Theresa M. Ennis, Anne Darrett, Lyn B. Westerlund, Marion B. Knowles, Frances G. Halsey, Mae V. Reid, Elbee A. Bynum, Aloyse M. Bosak, Beatrice J. Hawthorne, and H. Lorraine Schmitt are petitioners herein merely because they filed joint income tax returns with their respective spouses during the years in question. The remaining petitioners were 23 of the 26 stockholders of National Tanker Corporation, as hereinafter set forth.

Certain facts have been stipulated and are incorporated herein by reference.

American Overseas Tanker Corporation (hereinafter referred to as AOTC) was organized under the laws of Delaware on August 26, 1947, for the purpose of applying to the United States Maritime Commission (hereinafter referred to as the Commission) for the purchase of war surplus tankers from the Government pursuant to the Merchant Ship Sales Act of March 8, 1946 (50 U.S.C. secs. 17351746). The organizers of AOTC were Joseph E. Casey, Julius C. Holmes, E. Stanley Klein, Edward R. Stettinius, Jr., and William F. Halsey. Associated with these persons were William N. Westerlund, F. Willard Bergen, Frank M. Bynum, John Ellis Knowles, Charles Bosak, Frank A. Dwyer, John C. Ennis, George D. Hawthorne, William J. Hawthorne, Harold J. Maass, Roland T. Reid, Fred Barrett, and Frank J. Schmitt (hereinafter sometimes referred to as the Marine Transport group), who together were owners of the stock and officers of Marine Transport Lines, Inc., an organization experienced in the shipping business and particularly in the operation of tankers. The original issue of AOTC common stock consisted of 300 shares (out of 10,000 authorized shares) issued in 100-share lots to Casey, Holmes, and Klein, respectively, for $4 per share. It was contemplated at the time of original issue that a substantial portion of AOTC common stock would subsequently be allocated to Halsey, Stettinius, and members of the Marine Transport group. Casey was elected president and treasurer; Holmes served as vice president and secretary; Casey, Holmes, and Klein together comprised the board of directors.

Under the Merchant Ship Sales Act the Commission was given authority to dispose of surplus tankers, built by the Government dur

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ing World War II, at statutory sales prices (essentially 872 per cent of prewar domestic cost of construction, subject to certain adjustments). Citizens were given the right to apply to the Commission to purchase tankers and, if the Commission decided that the particular applicant was possessed of the necessary ability, financial resources, etc., and that the sale would carry out the purposes of the Act, the Commission was directed to sell to the citizen applicant at the statutory sales price. Noncitizens could also apply to purchase surplus tankers, in which case the Commission was directed to make certain additional determinations, such as that the sale would not be inconsistent with the established policy regarding sales to aliens, that the tanker was not needed for national defense, or for the promotion of the American Merchant Marine, and that no satisfactory offer for sale or charter had been received from a United States citizen for a prescribed period. Citizen-applicants were thus given preference over alien applicants; to qualify as a citizen, a corporation had to be a domestic corporation the controlling interest in which was owned by United States citizens free of any fiduciary or contractual obligation or relationship to aliens.

The supply of Government tankers and the net approvals for sale by the Commission, pursuant to the Merchant Ship Sales Act, were as follows:

Approvals for sale during quarter minus cancellation of prior approvals.
Subject to changing requirements of the Government.

Sales to noncitizens ceased Mar. 1, 1948.

Sales to citizens ceased Jan. 15, 1951.

On August 27, 1947, AOTC filed with the Commission an application to purchase 20 T2-SE-A1 tankers for cash. The application stated that although the applicant had no shipping experience, its organization would comprise experienced shipping personnel; that

title was to be taken in the name of a proposed wholly owned Panamanian subsidiary; that the vessels would be placed under Panama registry or flag; and that the vessels would be chartered to American oil companies on a long-term basis.

On September 18, 1947, AOTC filed with the Commission Amendment No. 1 to its application, providing in effect that instead of taking title to any tankers in a Panamanian subsidiary, title would be taken in the name of AOTC, a United States citizen. The amendment was filed in the light of a change of policy of the Commission regarding sales to aliens, which occurred about this time. All other provisions of the application, including that for Panamanian registry, remained unchanged.

On September 19, 1947, the Commission approved the application of AOTC, as amended, for the cash purchase of 5 type T-2 tankers for American title and for operation under the Panamanian flag. At the same time the Commission accorded AOTC a "preference" with respect to future allocation of the balance of 15 tankers for Panamanian registry.

A meeting of the directors of AOTC was held on October 13, 1947, attended by Casey, Holmes, and Klein, at which it was agreed that the interested parties be invited to participate in AOTC common stock as follows:

Participation of the Marine Transport group was based on its responsibility for certain arrangements concerning the chartering, survey, repair, and delivery of tankers purchased by AOTC from the Commission, as well as the keeping of accounts and preparation of tax returns for AOTC. It was further resolved that Klein be authorized to negotiate for financing with banks and other institutions, and that he also be authorized to allot all or part of the remaining 20 per cent of common stock and pledge corporate assets to secure appropriate financial arrangements. On the same date, Casey and Holmes resigned as treasurer and secretary, certain other officers were elected, and Blackwell Smith, an attorney, was elected a director. Thereafter, the officers of AOTC were Casey, president; Holmes, vice president; George D. Hawthorne, vice president; Blackwell Smith, secretary-treasurer; and James G. Mackey, assistant secretary-treasurer. The directors were Casey, Holmes, Klein, and