dissenting: In my opinion, there is no basis for the decision of the majority that the liquidation by the parent of its subsidiary should not be governed by section 332. Neither the statute nor sound tax policy justifies such action.
The basic facts are that the parent corporation brought about a sale of certain operating assets from a domestic subsidiary to a foreign subsidiary and then proceeded to liquidate the domestic subsidiary under section 332 of the Code. The business of the domestic subsidiary was thereupon carried on by the foreign subsidiary. The sale of assets from the domestic to the foreign subsidiary was a taxable transaction.
The argument of the respondent, as summarized by the majority opinion, was “that since Pintsch’s business was continued by ISI after the liquidation, no ‘complete liquidation’ occurred and section 332 does not apply.” In upholding this argument and accepting the application of section 368(a) (1) (D) to the facts in this case, I believe the majority is in error. The majority, citing Ralph C. Wilson, Sr., 46 T. C. 334 (1966); South Texas Rice Warehouse Co., 43 T.C. 540 (1965), reversed in part and affirmed in part sub. nom. Davant v. Commissioner, 366 F. 2d 814 (C.A. 5, 1966), certiorari denied 386 U.S. 1022 (1967); and James Armour, Inc., 43 T.C. 295 (1964), has disregarded the basic elements of the series of transactions present in this case and has substituted an artificial test wholly at variance with the underlying policy of section 332
In applying the principle enunciated in the cases cited above, the majority makes no distinction between a liquidation of a corporation by its individual shareholders under section 331 and a liquidation by a parent corporation of its subsidiary imder section 332. In a liquidation under section 331, it is contemplated that the operating assets of the liquidated corporation will no longer be used by the shareholders to carry on the business in the corporate form. See sec. 1.331-1 (c), Income Tax Regs. The courts generally inquire as to whether the business being liquidated is continued in the corporate form by the same shareholders. If there is continuity of business enterprise and proprietary interest, the liquidation under section 331 is not respected and capital gain treatment to the shareholders is denied, e.g., Davant v. Commissioner, supra.
These same principles have provided the foundation for decisions by this Court to disregard the sale of assets by a liquidating corporation to a related corporation solely for cash or other property and find that the stock exchange requirements of sections 354 (a) (1) and (b) and 356(a) (1), in the framework of a section 368(a) (1) (D) reorganization, are met when, after a series of transactions is completed, the shareholders of the liquidating corporation retain their proprietary interest in the same going business although in another corporate shell. On this basis, we have consistently held, as the majority does in this instance, that section 368(a) (1) (D) takes precedence over section 331. See Ralph C. Wilson, Sr., supra at 344; South Texas Rice Warehouse Co., supra at 569; and James Armour, Inc., supra at 308.
The reason for applying the reorganization provisions to a liquidation under section 331, followed by a reincorporation of the business, is that to do otherwise would be to grant capital gain treatment to shareholders on distributions from the earnings and profits of the distributing corporation otherwise taxable as dividends. In these circumstances, the additional advantage of obtaining a stepped-up basis for the reincorporated assets is also objectionable. Not to treat the transaction as a distribution of a dividend goes against the basic tenet of subchapter C that a mere readjustment of continuing interest of the individual shareholders under the corporate form does not give rise to a sale or exchange of a capital asset. Nicholson, “Recent Developments in the Reincorporation Area,” 19 Tax L. Rev. 123 (1964); Morrison, “The Line Between Liquidations and Reorganizations,” 41 Taxes 785 (1963); Rice, “When Is a Liquidation Not a Liquidation for Federal Income Tax Purposes?,” 8 Stan. L. Rev. 208 (1956) ; “A Proposed Treatment of Reincorporation Transactions,” 25 Tax L. Rev. 282 (1970).
This thinking is not applicable to section 332, which provides for the liquidation of a subsidiary into a parent corporation. It was never contemplated as a prerequisite to a liquidation under this section that there be a discontinuation of the business in the corporate form.
In enacting section 141 of the Revenue Act of 1934,1 Congress had severely limited the privilege of allowing affiliated corporations to file consolidated returns and thus greatly increased the potential tax liability of multiple corporations. As aptly pointed out by the majority (see p. 219), section 332 was enacted in 1935 as section 112(b) (6),2 and reenacted in 1936 and subsequent years, to permit simplification of the corporate structure without the recognition of gain. President Roosevelt’s message to Congress on Tax Revision, June 19,1935,4 The Public Papers and Addresses of Franklin D. Roosevelt 276 (1935) ; 80 Cong. Rec. 8799 (1936) (Senate discussion); Confidential Hearings on H.R. 12395 before the Senate Committee on Finance, 74th Cong., 2d Sess., pt. 1, p. 71 (1936) ; 80 Cong. Rec. 10270 (1936) (House discussion on the report of the Conference Committee). See also Hearings on H.R. 8974 before the Senate Committee on Finance, 74th Cong., 1st Sess., pp. 171, 302 (1935), for an expression of this view by witnesses before the committee prior to the enactment of the predecessor of section 332 (section 112(b) (6)) in the Revenue Act of 1935.
In referring to the Revenue Act of 1936 (reenacting the predecessor of section 332), the Supreme Court stated that the provision “made distributions to parent companies nontaxable in order to encourage the simplification of corporate structures. It was avowedly for this reason that section 112(b) (6) provided that no gain or loss to the parent company should in such case be recognized.” Helvering v. Credit Alliance Co., 316 U.S. 107, 112 (1942). Thus, it is clear that the continuation of the business enterprise was contemplated in section 332 liquidations.
Finally, there is no requirement in section 332, and the legislative history does not indicate that Congress intended, that the business of the liquidated subsidiary be operated as a division of the parent as opposed to being conducted in the corporate form in another subsidiary of the parent. Clearly, no gain or loss would have been recognized if the parent corporation in this case had liquidated its domestic subsidiary and had itself continued the same business with the same assets. There is no reason to adopt a different rule where, as in the case before us, those assets are taken over by another subsidiary. The legislative purpose behind section 332 of encouraging the simplification of corporate structures is fulfilled in this latter situation, as well as in the former one, in that the functions carried on by three corporations prior to the transactions in this case are now being performed by only two corporations.
Furthermore, the principle which is the foundation of objections to granting section 331 exchange treatment to reincorporations, namely, that a readjustment of a continuing interest in property under modified corporate forms is not a proper occasion for the recognition of gain or loss to shareholders, is embodied in section 332. This section does not provide for exchange treatment, and there is no recognition of gain or loss. In addition, in a section 332 liquidation, the parent ordinarily takes a carryover basis under section 334(b) (l),3 and the earnings and profits of the subsidiary are carried over to the parent under section 381.
Under these circumstances, there can be no bailout of the earnings and profits of the subsidiary at capital gain rates as in the case of a section 331 liquidation. Therefore, the major abuse in the reincorporation area is not present in a section 332 liquidation, and there is no basis for the application of an artificial concept which undermines the policy embodied in this section of encouraging the simplification of corporate structures.
In substance, the respondent’s only justification for disregarding the liquidation of Pintsch under section 332 results from the fact that prior to liquidation Pintsch sold its operating properties so that only cash and receivables were received by the parent in the liquidation. We have held that the word “property,” as used in section 332 (section 112(b) (6) in the 1939 Code), includes money. International Investment Corporation, 11 T.C. 678 (1948), affirmed per curiam 175 F. 2d 772 (C.A. 3, 1949). Thus, we have recognized that situations might arise in which the liquidation of a subsidiary under section 332 would result in the receipt of money alone and no other property.4 Therefore, it is clear that a prior sale of assets is not a bar to a liquidation under section 332. Burnside Veneer Co. v. Commissioner, 167 F. 2d 214 (C.A. 6, 1948), affirming 8 T.C. 442 (1947); Tri-Lakes S. S. Co. v. Commissioner, 146 F. 2d 970 (C.A. 6, 1945), reversing a Memorandum Opinion of this Court; International Investment Corporation, supra; Robert Gage Coal Co., 2 T.C. 488 (1943).
A different rule should not apply solely because the sale was made to another corporation, the stock of which was owned or controlled by a common parent, unless it can be shown that the purpose of the sale was to obtain some artificial tax advantage. In the case before us, it is not contended that the sales price varied substantially either from the basis or from the fair market value of the property sold. To give recognition to the sale does not result in either the deferment or loss of revenue. To fail to give recognition would be tantamount to holding that a domestic parent or affiliate cannot sell property to a related foreign corporation, irrespective of price.
While I don’t agree with the majority, if section 332 is to be disregarded, I would concur with Judge Sterrett’s view that the cash transferred by ISI to Pintsch should be treated as a dividend coming from ISI when received by the parent from Pintsch.5
See. 141 of the Revenue Act of 1935, 49 Stat. 1014, Pub. L. No. 216, 73d Cong., 2d Sess. (May 10,1934).
See. 110(a) of the Revenue Act of 1935, 49 Stat. 1014, Pub. L. No. 407, 74th Cong., 1st Sess. (August 1935).
I also see no objection to a parent corporation obtaining a see. 334(b)(2) basis in tbe assets of a business conducted by a liquidated subsidiary and subsequently transferring those business assets to a new subsidiary rather than operating the business itself.
The International Investment Corporation case reversed the position adopted by this Court in Stimson Mill Co., 46 B.T.A. 141 (1942), affirmed on different grounds 137 F. 2d 286 (C.A. 9, 1943), that sec. 112(b)(6) (the predecessor of see. 332) had no application -where money alone was distributed to a parent upon the liquidation of a subsidiary.
The Stimson Mill Co. decision was contrary to the interpretation placed on this section by G.C.M. 19435, 1938-1 C.B. 176. The decision was also contrary to congressional intent as revealed by a careful consideration of the legislative history of see. 112(b)(6). See the decision of this Court in the International Investment Corporation case in 11 T.C. at 682 — 683 for an excellent presentation and discussion of this history. Furthermore, in Robert Gage Coal Co., 2 T.C. 488 (1943), and Burnside Veneer Co., 8 T.C. 442 (1947). this Court assumed that “property,” as used in sec. 112(b)(6), included money, and in Tri-Lakes S. S. Co. v. Commissioner, 146 F. 2d 970 (C.A. 6, 1945), reversing a Memorandum Opinion of this Court, and upon the appeal of the Burnside Veneer Co. case, the Sixth Circuit held that the term “property,” as used in sec. 112(b)(6), included money. On this basis, we held in the International Investment Corporation case that we would no longer follow the Stimson Mill Co. case upon this question.
The resulting tax liability would, of course, be greatly reduced or eliminated by the foreign tax credit under sec. 902.