dissenting in part: As I read the majority opinion, it embraces the thesis that a distribution, which is in form accomplished as part of a complete liquidation, must be treated as a section 331 distribution unless the entire transaction can be fitted within the definition of a reorganization contained in section 368 (a). My brother Sterrett lends credence to this analysis by focusing upon the reorganization provisions and struggling with the technical obstacles with which those provisions abound. The net result is to escalate one prong of Joseph C. Gallagher, 39 T.C. 144 (1962), and Hyman H. Berghash, 43 T.C. 743 (1965), affd. 361 F. 2d 257 (C.A. 2, 1966), from the level of a distinguishable rationale to a mandated doctrine of wide application. I would have thought that the “form versus substance” criteria (cf. Bazley v. Commissioner, 331 U.S. 737 (1947)) with which the decided cases abound, would have been more than sufficient to preclude such supine acceptance of the tyranny of labels and to support the conclusion that no liquidation of Lammerts (Old) occurred herein.1
Let us assume that Henry P. Lammerts liad, prior to his death, caused the liquidation of Lammerts (Old) and, after retaining the accounts receivable, loan to shareholder, and Ramp Garage property (hereinafter referred to as the specified assets or the retained specified assets), joined in the immediate transfer of his share of the operating assets of the automobile agency to Lammerts (New) in exchange for the appropriate amount of preferred and common stock. I doubt whether anyone would seriously question that he would have realized dividend income in the full amount of the value of the retained assets. Similarly, if Henry P. Lammerts had in his will divided his common stock in Lammerts (Old) between his widow and his son and, upon distribution of the common stock in accordance with those directions, the widow and the son had accomplished the liquidation and reincorporation exchange, with the widow retaining the specified assets, the widow would also clearly have realized a comparable amount of dividend income. Finally, if Henry P. Lammerts had directed his executors to accomplish both the liquidation and the reincorporation exchange and then to distribute the retained specified assets and the preferred stock of Lammerts (New) to his widow and the common stock to his son, the estate would have been properly charged with the same amount of dividend income. This case simply involves the question whether the retained assets should escape the characterization of dividend income simply because, pursuant to a preconceived plan, which was promptly implemented upon the death of Henry P. Lammerts, the liquidation and reincorporation stages are handled separately — the liquidation by the estate and the reincorporation by the widow and the son. I think a negative answer to that question is clearly indicated.
I am aware of the concept — which is not without its troublesome aspects — that shareholder as well as corporate purposes may legitimatize various types of corporate readjustments. See Parshelsky's Estate v. Commissioner, 803 F. 2d 14, 21 (C.A. 2, 1962), reversing 34 T.C. 946 (1960); Ballenger v. United States, 301 F. 2d 192, 198 (C.A. 4, 1962). But I need not tarry along this path, for the record is devoid of any probative evidence which could cause us to hold that there was any raison d’etre, aside from tax considerations, for the liquidation of Lammerts (Old) and the retention of the specified assets. Compare Helvering v. Ellchorn Coal Co., 95 F. 2d 732 (C.A. 4, 1937).
I recognize, of course, that the absence of a “business purpose,” developed for application in the corporate reorganization area by Gregory v. Helvering, 293 U.S. 465 (1935), does not automatically destroy the tax validity of a corporate liquidation. A liquidation can be motivated solely by tax considerations and still be clearly valid (see United States v. Cumberland Pub. Serv. Co., 338 U.S. 451, 455 (1950)) —e.g., the liquidation of a corporate business and its subsequent operation as a partnership or sole proprietorship. But this does not mean that a purely technical liquidation must always be recognized for tax purposes.2 The liquidation must still hme reality and substance as a liquidation and it is here that petitioners’ case falls apart.
Amounts received on liquidations are treated as the proceeds of an “exchange” only because section 331 says they should be. Indeed, in the early years of the income tax, liquidating distributions were treated as dividends subject to ordinary tax and not as capital gains. H. Rept. No. 179, 68th Cong., 1st Sess., pp. 11-12 (1924); S. Rept. No. 398, 68th Cong., 1st Sess., pp. 11-12 (1924) ; H. Rept. No. 844, 68th Cong., 1st Sess., p. 14 (1924). Congress analogized a liquidation to a sale or exchange because it felt that a significant transmutation occurred in the shareholder’s interest. Davant v. Commissioner, 366 F. 2d 874, 882 (C.A. 5, 1966), modifying 43 T.C. 540 (1965); Pridemarh, Inc. v. Commissioner, 345 F. 2d 35, 41 (C.A. 4, 1965), reversing 42 T.C. 510 (1964). See S. Rept. No. 398, supra. Where a corporation is liquidated and its business continued in noncorporate form, there is validity to that analogy. And where the business of the new corporation differs substantially from that of the old, the analogy is equally valid. See Pridemark, Inc. v. Commissioner, 345 F. 2d at 41; Standard Realization Co., 10 T.C. 708, 714-715 (1948). Similarly, the analogy remains where there is a significant change of ownership, although it can become strained where there is a continuity of ownership, albeit somewhat reduced, on the part of a shareholder who retains some of the assets. See Joseph C. Gallagher, 39 T.C. 144 (1962). But where a formal liquidation is followed instanter by a prearranged reincorporation of the very same business with the very same owners, the analogy fails completely. See Davant v. Commissioner, 366 F. 2d at 882. Compare also the contrasting of “genuine liquidation” with “going concern” in United States v. Cumberland Pub. Serv. Co., 338 U.S. at 454-455.
The majority does not deny that there was well-nigh perfect continuity of business and, in fact, details the many respects in which the business continued without a break. The only element of business discontinuity was the lapse in the General Motors dealership. But that lapse was solely in consequence of Henry’s death and would have occurred whether or not the liquidation-reincorporation took place.
The problem lies with continuity of ownership. After Henry’s death, the stock of Lammerts (Old) was technically vested in Henry’s estate. By way of contrast, the stock of Lammerts (New) was acquired by Hildred and Parkinson. Thus, continuity of ownership can be established only by viewing the estate as a mere conduit for Hildred’s and Parkinson’s ownership. I think that this is justifiable.3 It is actual ownership, and not formal title to the corporate stock, which is important in determining continuity of interest in a corporation. Helvering v. Alabama Asphaltic Limestone Co., 315 U.S. 179 (1942). Under the will, Hildred and Parkinson were the sole successors to Henry’s interest in the corporation, and so I think that they should be regarded as in substance the owners of Lammerts (Old), especially in view of the fact that they were sole executors of the estate.4 True, Henry’s will directed the formal liquidation of Lammerts (Old), so that the legatees’ rights were to the corporate assets rather than to the corporate stock. But it is precisely the ownership of the corporate assets which is significant, not formal ownership of the corporate shell. In Helvering v. Alabama Asphaltic Limestone Co., supra, the creditors of the old corporation had no right (as creditors) to the stock of the old corporation, only to its assets: yet the Court found continuity.
There is thus complete continuity of ownership, as well as complete continuity of business, between Lammerts (Old) and Lammerts (New). What Hildred and Parkinson had before the liquidation is virtually identical to what they had after the reincorporation. Of course, Hildred’s interest in Lammerts (Old) consisted of an interest in an estate which owned common stock in that corporation. Her interest in Lammerts (New) consisted of the direct ownership of preferred stock. I do not regard this difference as great enough to cause any analogy to a sale or exchange to be appropriate.5 Compare Easson v. Commissioner, 294 F. 2d 653, 660 (C.A. 9, 1961).
There are numerous examples where the courts have imposed a judicial gloss on the words of provisions of the Internal Revenue Code dealing with the use of the corporate form to bring about readjustments in business enterprises. Thus, in the reorganization area, the doctrines of “continuity of interest” and “business purpose” have long been accepted tools for decision. E.g., Pinellas Ice Co. v. Commissioner, 287 U.S. 462 (1933); Helvering v. Alabama Asphaltic Limestone Co., supra; Gregory v. Helvering, 293 U.S. 465 (1935). The “continuity of business enterprise” thesis in the area of carryovers of net operating losses is another example. E.g., Libson Shops, Inc. v. Koehler, 353 U.S. 382, 386 (1957). A further illustration can be found in cases examining the question whether a transfer of assets to a corporation is a sale for a corporate evidence of indebtedness entitled to capital gain treatment or a tax-free exchange under section 351. Compare, e.g., Burr Oaks Corp.,43 T.C. 635 (1965), affd. 365 F. 2d 24 (C.A. 7, 1966), with Charles E. Curry, 43 T.C. 667 (1965). Similarly, the courts have on occasion refused to characterize a distribution in kind by a corporation which continues in business as a liquidating dividend when it is immediately disposed of by the recipient shareholder. See cases collected in Waltham Netoco Theatres, Inc., 49 T.C. 399, 405 (1968), affd. 401F. 2d 333 (C.A. 1, 1968). We ought not to flinch from importing a comparable judicial gloss into section 331 in order to reject petitioners’ contentions herein. Our obligation to do so is reinforced by the express concern of Congress over problems in the liquidation-reincorporation area and its confidence that those problems could be dealt with “by judicial decision or by regulation within the framework of the other provisions” of the 1954 Code. See H. Kept. JSTo. 2543, 83d Cong., 2d Sess., p. 41 (1954). The respondent has sought to justify that confidence (see secs. 1.301-1(1) and 1.331-1 (c), Income Tax Regs.) and we should be no less forthright where there is sufficient flexibility to permit us to act.
The fact that Henry’s will directed the liquidation does not require a different conclusion. The testamentary provision was no more than the directive, albeit a posthumous one, of a controlling stockholder. To say that the executors were legally bound to obey, and hence did not act of their own volition, is to say no more than that the liquidation was an integral part of a preconceived plan and to confirm the mutual interdependence of the various steps of the transaction.
The liquidation and reincorporation were merely steps in a preconceived plan. They added nothing to the final result and may therefore be disregarded. Cf. Helvering v. Alabama Asphaltic Limestone Co., 315 U.S. at 184-185. Under the plan, the business assets were to be out of the corporate solution and in the hands of Hildred and Parkinson only in a technical legal sense and only for a fleeting moment. The fact that Hildred and Parkinson received undivided interests in a unified business provides objective support for this conclusion. In short, both, the liquidation and the reincorporation were meaningless events in the accomplishment of the transaction and can be disregarded for tax purposes. Cf. Minnesota Tea Co. v. Helvering, 302 U.S. 609 (1938); Helvering v. Bashford, 302 U.S. 454 (1938); Gasco Products Corp., 49 T.C. 32 (1967); William F. Wolf, Jr., 43 T.C. 652 (1965), affd. 357 F. 2d 483 (C.A. 9, 1966). “A given result at the end of a straight path is not made a different result because reached by following a devious path.” See Minnesota Tea Co. v. Helvering, 302 U.S. at 613.
I would hold that there was no liquidation within the meaning of section 331. See Davant v. Commissioner, 366 F. 2d at 882-883; Pridemark, Inc. v. Commissioner, 345 F. 2d at 41. Consequently, the distributions involved herein cannot be treated as received in an “exchange” under section 331 and therefore cannot receive capital treatment. No other section of the Code specifically requires the recognition of a liquidation for tax purposes. Of course, the general language of section 61 might require the recognition of a merely technical liquidation as a taxable event. But I have concluded that it does not, for much the same reasons that I have concluded that the transaction was outside section 331.
Neither Joseph C. Gallagher, supra, nor Hyman H. Berghash, 43 T.C. 743 (1965), affd. 361 F. 2d 257 (C.A. 2, 1966), forecloses this result. Admittedly, there is unfavorable language in those opinions which leaves “room for some skepticism.” 6 See Simon v. United States, 402 F. 2d 272, 277 (Ct. Cl. 1968). But both cases involved facts quite different from those now before us. In Gallagher, a substantial (38.05 percent) minority interest left the corporate enterprise, and a substantial (27½ percent) new minority interest took its place in the successor corporation. And in Hyman H. Berghash, supra, half of the stock of the new corporation was owned by a new investor.7 In both cases, therefore, there was a meaningful change in the ownership, so that the successor corporation could not easily be equated to the predecessor corporation.
Since Lammerts (Old) and Lammerts (New) are to be regarded as the same corporation, the receipt of the retained specified assets constitutes as distribution with respect to stock under section 301. It is perhaps arguable that what occurred was a redemption of part of the stock of Lammerts (Old) for those assets. Compare Casco Products Corp., supra. See sec. 317 (b). But, even so, section 302(d) would make section 301 applicable. Obviously, neither subsection (b) (2) nor (b) (3) of section 302 would apply, especially in light of the attribution rules of section 318. As a result, there would appear to be no basis for considering the distribution as not being “essentially equivalent to a dividend.”
As far as the presence of a reorganization is concerned, I agree that there was not a “mere change in identity, form, or place of organization” so as to constitute an (F) reorganization for the reasons set forth in the majority opinion. I also have great difficulty in finding a (D) reorganization, because this requires accepting the premise that the existence of two corporations should be recognized. Such a holding also involves, as my brother Sterrett’s opinion reveals, adopting a dichotomous approach that, on one hand, the entire transaction was “integrated” in order to find a reorganization but that, on the other hand, the distribution and retention of the specified assets were “functionally unrelated” to the reorganization in order to deal with the limitations of the boot provisions of section 356 (a) due to the stepped-up basis attendant upon Henry’s death and thus bring the distribution under section 301. See Whitaker, fn. 1, supra. The difficulties arising from the dichotomous approach would, of course, also be present in a holding that there was an (E) reorganization. I also note that there is serious doubt as to whether the record herein would sustain a finding of the required “business purpose” and, in any event, no argument based upon this type of reorganization was made by the parties herein.
Simpson, /., agrees with this dissent.The liquidation-reineorporation area Is a prickly thicket through which the courts, the respondent, and even the Congress, have traveled only with considerable difficulty. See, e.g., Wood, “A Proposed Treatment of Reincorporation Transactions,” 25 Tax L. Rev. 282 (1970) ; Pugh, “The F Reorganization ; Reveille for a Sleeping Giant?,” 24 Tax L. Rev. 437, 453-456 (1969) ; Whitaker, “Liquidation and Reincorporation,” 18th U. So. Calif. Tax Inst. 191 (1966) ; Lane, “The Reincorporation Game: Have the Ground Rules Really Changed?,” 77 Harv. L. Rev. 1218 (1964).
I realize that this line of reasoning may cast doubt upon the liability of the estate for the tax on the dividend represented by the retained specified assets. But petitioners have not raised this issue, even alternatively, and consequently we need not concern ourselves with this aspect of the case.
Survaunt v. Commissioner, 162 F. 2d 753, 757 (C.A. 8, 1947), affirming 5 T.C. 665 (1945), is clearly distinguishable. In that ease, the Court of Appeals emphasized that the transfer to the widow was not part of the plan and in fact took place more than a year after the decedent’s death and more than 7 months after the transfer of assets to the new corporation.
My rationale is based upon the merger of the technical title of the estate into the actual ownership of Hildred and Parkinson and not upon a recognition of actual ownership by the former and the attribution thereof to the latter. I recognize that the statutory attribution rules are not applicable to reorganizations. See Hyman H. Berghash, 43 T.C. 743, 757 (1965).
1 think that the majority has misinterpreted the language it quotes from Gallagher, 39 T.C. at 157.1 read that language to say that if there is a valid liquidation, the resulting “exchange” must necessarily be treated as a capital transaction unless it is incident to a reorganization.
The parties stipulated that a “complete liquidation” had taken place, and this may have played some part in the decision. See Ilyman H. Berghash, 43 T.C. 743, 7i59 (1965).