OPINION.
SteRnhagen, Judge:The excess ($206,369.57) over cost ($56,607.05) received by the taxpayer corporation for 12.303 shares among the 112,974 shares disposed of by it in 1937 to subscribing shareholders is treated by the Commissioner as taxable gain, and this the taxpayer challenges as- contrary to Regulations 94. article 22 (a)-16. Both parties recognize that this article of the regulations is controlling. Cf. Helvering v. Reynolds Tobacco Co., 306 U. S. 110; Commissioner v. Air Reduction Co., 130 Fed. (2d) 145; Dr. Pepper Bottling Co. of Miss. 1 T. C. 80. The question for decision is therefore confined to whether the “real nature of the' transaction” disposing of the 12,303 shares, “under all the facts and circumstances," was a dealing by the corporation in its own shares “as it might in the shares of another corporation." Pittsburgh Laundry, Inc., 47 B. T. A. 230. 233.
Except for the fact that the corporation disposed of the shares for money, there is no similarity between this disposition and a sale of shares of another corporation. The corporation was not “dealing” in its own shares. Neither the acquisition of the shares nor their disposition, although both were under different circumstances and with different motives and under different plans, could or would have been considered or carried out in the shares of another corporation. Profit was not behind the impulse to acquire these shares in the first place or behind the later impulse to distribute them to shareholders. The first was a step in a profit-sharing plan for employees, whereby the employees might acquire or enlarge their proprietor interest in the business. This could not have. been achieved by acquiring the shares of another corporation. The profit-sharing plan was inoperative only because the necessary, earnings upon which it was conditioned had not been realized. The disposition in 1937 was likewise not actuated by a motive to sell at a profit, but by the new general plan to restate the corporation’s capital and issue more shares as a method of procuring additional funds for capital purposes.
The accounting for both these transactions manifests this absence of a profit motive as an explanation of the transactions. The shares were not carried as an asset. The cost was kept in the treasury stock account and the excess received from the shareholders’ subscriptions allocable to 12,303 shares was assigned to the capital and the capital surplus accounts, none of the proceeds being accounted for as earnings or profits or posted to the earned surplus account. If, however, the corporation had been dealing in the shares of another corporation, they would have been carried as an asset, the acquisition in the first place could not have appeared in the treasury stock account, and the proceeds of sale, whether to its shareholders, employees, or to outsiders, would have been credited to earnings and profits and posted to earned surplus. These bookkeeping matters are, of course, not controlling as to the legal or real nature of the transaction, but they are not without significance in considering whether the corporation was dealing in its own shares as it might in the shares of another corporation.
The disposition of these shares may not be treated as if it were a separate and isolated transaction whereby 12,303 treasury shares were sold for cash. The regulations say that the characterization for tax purposes depends upon the real nature of the transaction. The real nature of this transaction in so far as it relates to these 12,303 shares is that it was an incident of the adjustment of the corporation’s capital stock as a means of getting new funds needed for capital purposes. Nothing in the record indicates that the 12,303 shares were being dealt with by themselves or that they would have been dealt with as a disposition of treasury shares if there had been no program of recapitalization. It was but part of a method of getting larger investments from the shareholders, after which the further capital needs were to be procured by selling additional new shares to bankers. To say that the whole refinancing is to be regarded as a means of selling these treasury shares at a profit and escaping tax upon the gain is to misplace the emphasis. The corporation might, to be sure, have accomplished its refinancing purpose without using these treasury shares, and if it had done so, the present controversy would not have arisen; but it seems to us unreasonable to say that the disposition of the treasury shares was a cleverly devised means of realizing a gain and avoiding tax upon it. The reference in the May 11, 1937, letter to the undistributed profits tax has no more significance here than in the Dr. Pepper case. It simply meant that since the corporation could not avoid the undistributed profits tax by using its existing earned surplus for plant and equipment it might better procure its new working capital by the method of issuing new shares. This rationale does not affect the characterization of the disposition of the 12,303 treasury shares as a step in that method.
The real nature of the disposition of all the 112,974 shares was a means to procure additional capital, and in this the use of the treasury shares was a part. We hold that the corporation thereby realized no gain, and that the Commissioner’s determination was incorrect.
The facts and circumstances in the present case lead as directly to the conclusion that this was not a realization of gain as did those in the Dr. Pepper Bottling case, where the Commissioner’s determination of gain was reversed. The purpose of the purchase of the corporation’s shares, in that case, was a redistribution of shares among the shareholders ; here it was a plan for profit sharing among the officers and employees. The purpose of the sale, in that case, of the, treasury shares although it was a departure from the original purpose was a readjustment of capital, and the undistributed profits tax threatened if the earnings were used for capital purposes instead of being distributed; the same is true in the present case. In both cases, the threefold criterion of the real nature of the transaction is present. See also Brockman Oil Well Cementing Co., 2 T. C. 168. The cases of Helvering v. Edison Bros. Stores, Inc., 133 Fed. (2d) 575; Brown Shoe Co. v. Commissioner, 133 Fed. (2d) 582; Commissioner v. Air Reduction Co., 130 Fed. (2d) 145, and Dow Chemical Co. v. Kavanagh, 139 Fed. (2d) 242, are all cases where the sale of the corporation’s treasury shares was merely a sale, albeit, in the three earlier cases to employees, and there were no circumstances which gave it a character or effect different from a sale of the shares of another corporation. In none of them were the circumstances such as to establish that the sale was not a mere sale but was instead an element in the readjustment of the corporation’s capital.
The taxpayer, as a precautionary second point, pleaded the deducti-bility of a payment of transfer agent’s fees of $5,046.77, but concedes that if it is successful in overcoming the determination as to the $206,-369.57 such a deduction is not available to it.
Reviewed by the Court.
Decision will he entered under Rule 50.