dissenting: As the trier of fact in this case I have reached a conclusion different from the majority with respect to the “threshold issue” — was there a bona fide sale? I am concerned that the majority has overstepped the burden of proof requisites and has placed unreasonable burdens upon petitioner because of the admitted tax-shelter device involved. Although I agree that we are required to give close scrutiny to such devices in circumstances such as here, our duty is to interpret and apply the law as it has been enacted by Congress, even if that result is sometimes incongruous with our own beliefs as to what the law should allow. The Code is not a perfect instrument; its wording allows some to obtain tax advantages many think undesirable from a tax policy point of view and perhaps even socially unjust. In this instance it appears to me that the majority projects itself beyond the role of the trier of facts with due regard to the burden of proof and strikes down an otherwise bona fide sale. In doing this the majority decides against petitioner primarily on the basis of what evidence could or should have been presented rather than what was presented.
Although I agree that the record is not conclusive, in my judgment petitioner has presented sufficient evidence to refute the presumption of correctness of respondent’s determination and has established a prima facie case in favor of a bona fide sale. This prima facie case was not rebutted by respondent.
In emphasizing “gaps” in the evidence the majority in my judgment overlooks the fact that this evidence (or lack of evidence) for the most part is not relevant to the precise issue, namely, whether or not a bona fide arm’s-length sale occurred.
I find the evidence persuasive that Santeiro and Rousseau and their professional advisers were independent third parties. While it is true that we need not accept at face value the testimony of an interested party, it is also true that we can give weight to such uncontradicted testimony. I found the testimony herein credible, forthright, and uncontradicted.
One of the “gaps” which the majority stresses, for example, is the lack of evidence regarding the loan from the Bank of Nova Scotia to the buyers which was used to buy Mid-Western’s stock. What is important to me in this regard, as the evidence now stands, is the fact that petitioner was not privy to this transaction and that the stock transaction was not finalized by the mere transfer of corporate cash. Compare John D. Gray, 56 T.C. 1032 (1971).
Nor do I believe Rousseau’s and Santeiro’s activities with respect to Mid-Western, after the sale, to be relevant. These activities were independent and distinct from the sale. Petitioner had no voice in whether Mid-Western continued its existence after the sale. No evidence was presented suggesting the existence of any prearranged plan of liquidation.
Although agreeing that there were business motives on petitioner’s part for the transaction, the majority emphasizes the fact that there was no explanation as to why the divestiture took the form of a stock sale, “aside from the anticipated tax advantages.” There is nothing reprehensible in casting one’s transaction in such a fashion as to produce the least tax so long as the transaction does not depend upon sham or artifice. Gooding Amusement Co., 23 T.C. 408, 418 (1954), affd. 236 F. 2d 159 (6th Cir. 1956). See also Gregory v. Helvering, 293 U.S. 465 (1935); cf. Daniel D. Palmer, 62 T.C. 684 (1974).
In effect, the majority concludes that although petitioner had a valid reason for terminating his relationship with Mid-Western, his choosing the most advantageous way, from a tax standpoint, to sever this relationship so taints his motives that he should be denied the tax advantage he sought.
It is true that there are judicial limits as to what a taxpayer may do. The majority has aptly noted the following cautionary language in Minnesota Tea Co. v. Helvering, 302 U.S. 609, 613 (1938): “A given result at the end of a straight path is not made a different result because reached by following a devious path.” Petitioner, however, is not employing a devious path. The Code provides various methods for terminating a shareholder-corporation relationship. A controlling shareholder has the option of selling his stock or liquidating his corporation. Normally, the results are the same. However, as in this instance, where the shareholders have made a subchapter S election, the Code sanctions differing results, dependent upon whether there is a sale or liquidation.
Broadly speaking, in the case of a nonelecting corporation, the corporation is taxed on its income, whereas an electing corporation is not taxed on its income — the income is passed through the corporation to the shareholders and taxable to them. Consequently, if a subchapter S corporation is liquidated, the shareholders are taxed on the income. However, if the stock of the subchapter S corporation is sold, only the shareholders who are such at the close of the corporation’s taxable year are taxed on the income. See sec. 1373(b). Unlike the provisions in section 1374 for net operating losses, there is no allocation of income to shareholders who were not such at the close of the taxable year. This is a congressional sanction of assignment of income and the genesis of the tax benefit herein.
It is clear that a transaction such as this must be carefully scrutinized to ensure that the substance corresponds to the form. Griffiths v. Commissioner, 308 U.S. 355, 357-358. (1939). Higgins v. Smith, 308 U.S. 473, 476 (1940); Aaron Kraut, 62 T.C. 420, 428 (1974); John D. Gray, supra at 1069; Jack E. Golsen, 54 T.C. 742, 754 (1970), affd. 445 F. 2d 984 (10th Cir. 1971); cf. Athenaise M. Hill, 63 T.C. 225, 242-249 (1974). In my judgment, petitioner has passed the test. In reaching this result I have given consideration to the cumulative effect of the “gaps” relied upon by the majority. However, when I balance this against the positive unrebutted evidence presented by petitioner, I must conclude that he should prevail.
The fact that Mid-Western was not engaged in the active conduct of a trade or business should not change the result. Cf. Moline Properties, Inc. v. Commissioner, 319 U.S. 436 (1943); William B. Howell, 57 T.C. 546 (1972). Nor should the result be different merely because the corporation’s sole asset was cash. This only goes to the burden on the taxpayer to show substance to the transaction. Cf. John D. Gray, supra.
Since I have determined that the transaction was in substance a sale and not a liquidation, I would find that petitioner properly reported the gain from the sale as long term. Likewise, I would find that petitioner is not liable as a transferee. Respondent bases this contention solely on the sale versus liquidation issue which I would have found in favor of petitioner.
Not finding transferee liability, I would not reach the cattle feed issue.
Forrester and Scott, JJ., agree with this dissent.