*995 In 1922 petitioner organized corporation A under the laws of Illinois for the purpose of dealing in installment paper, it also having power to deal in corporate stocks and bonds. In order to furnish this corporation with necessary working capital, petitioner made a loan to it of certain securities which were to be returned to him in ten years, together with interest and dividends received on securities plus a sum equal to one-fifth of such dividends and interest. Corporation A became very prosperous. Shortly after its organization petitioner was advised by counsel that it should be reorganized under the laws of Delaware, but, although a plan of reorganization was prepared, and corporation B was organized under the laws of Delaware, nothing further was done until 1930. In that year petitioner organized corporation C and corporation D under the laws of the Bahama Islands. Thereupon, he transferred to corporation C, among other assets, his rights against A, arising out of the loan of capital, in exchange for all of C's stock. A transferred all of its assets to D for two-thirds of D's stock. C then canceled its rights arising out of petitioner's loan of capital, in return for one-third*996 of D's stock. D thereupon transferred all of its assets to B (the Delaware corporation) in return for all of B's stock, one-third of which was distributed by D to C, and two-thirds to A, which immediately transferred this stock to petitioner. D subsequently dissolved, but B and C continued to operate and do business. Held, transaction constituted a tax-free reorganization, that no taxable liquidation of corporation A occurred, and that cancellation of rights to return of capital from A did not result in taxable income to petitioner.
*685 This case comes before us on respondent's determination of a deficiency in petitioner's income tax for the year 1930 of $2,950,592.22, and involves the sole question of whether, as respondent contends, *686 petitioner derived in that year taxable gain from the transactions of certain corporations in which petitioner was a stockholder, or, as petitioner contends, these transactions constituted a corporate reorganization*997 within the meaning of the statute. The fair market value of the stock of the corporations involved was stipulated and has been incorporated in our findings.
FINDINGS OF FACT.
Petitioner resides in Chicago and has offices in Chicago and New York City. At all times and through 1930 he kept his accounts on the cash basis. For 1930 he filed his Federal income tax return with the collector at Chicago.
Petitioner in 1922 was a director of the Federal Electric Co. of Chicago, Illinois, which manufactured and sold electric appliances on the installment plan, the purchase price being payable in from six to twenty-four months. The purchasers would sign promissory notes in accordance with a deferred payment contract. Petitioner knew that the company was discounting its notes at 18 percent a year, and thought about buying some of these notes. In order to finance the purchase of these notes he organized the Corporate Investment Co., hereafter called "Investment", an Illinois corporation which he caused to be formed on August 16, 1922, with a capital stock of 600 shares of common without par value, for which petitioner paid into the corporation $6,000. Petitioner has at all times*998 been beneficial owner of the company's stock. The declared object of the corporation was "generally to deal in capital stock of corporations and bonds, debentures, notes, open accounts and other evidences of indebtedness of corporations, partnerships, trusts, associations and individuals; to buy, sell and deal in bills of lading, warehouse receipts, installment contracts and all kinds of personal property; and to act as agent for corporations, partnerships and individuals." Investment kept its accounts and made its Federal income tax returns on the accrual basis, and was actively engaged in business until 1927 at least. During these years it made from $6,000 to $26,000 a year.
Investment had assets of only $6,000 when it began in 1922. Petitioner knew of another venture in which a corporation had been lent a large amount of securities for a period of years on a guarantee to the lender of 1 percent a year in excess of the return on the securities. He accordingly agreed to furnish capital to Investment under a contract executed on September 13, 1922, by which, for the loan of certain stocks and securities for ten years, petitioner would receive each year the dividends or interest*999 on them plus, as interest on their loan, one-fifth of such increase, the material parts of the contract being as follows:
*687 WHEREAS, the party of the first part [Corporate Investment Co.] is about to engage in the business of purchasing deferred payment contracts for merchandise, said contracts to be signed by the original purchaser and to be endorsed and guaranteed by the respective vendor corporations;
WHEREAS, in the conduct of said business, the party of the first part requires a large amount of capital; and
WHEREAS, the said party of the second part [Munroe] has agreed and is willing to supply the credit basis for securing such capital on the terms and conditions hereinafter set forth.
THEREFORE, IT IS AGREED BY AND BERWEEN the parties hereto, as follows to-wit:
The said party of the second part does hereby give, grant, assign, sell, transfer and set over, unto the said party of the first part, to be the absolute property of the said party of the first part, with the right to sell, transfer, pledge and dispose of all or any of the following described property, to-wit:
[Here follows a detailed description of the property transferred.]
That in consideration*1000 of said transfer of said property to said party of the first part, the party of the first agrees for itself, its successors or assigns, as follows:
Ten years from the date hereof, any of the above securities transferred and delivered to said party of the first part which have not been sold or disposed of shall be delivered to the party of the second part, his heirs, executors, administrators, or assigns, at the time above stated, and in addition to said securities, there will be paid in cash the proceeds, if any, derived, as interests or dividends from said securities, plus one-fifth (1/5) of such amount each year, and said aggregate sum will bear interest at the rate of six (6) per cent per annum from the time the money is received until it is paid, but not compounded.
It is the purpose of this contract that in consideration of the furnishing of the capital to the said party of the first part, that the said party of the first part will pay as a fee for said capital, not only the amount that said company receives as interest or dividends from said capital but an additional sum equivalent to one-fifth (1/5) of such receipts.
In case all or some part of the securities this day*1001 delivered have been sold, that then ten years from the date hereof there will be paid to the said party of the second part, his administrators, executors, or assigns, in cash, the proceeds of the sale of said securities, plus seven (7) per cent interest per annum on the proceeds of said sale, to be computed from the time the money is received until it is paid, but said interest shall not be compounded.
IT IS UNDERSTOOD AND AGREED THAT all interests or dividends received shall be used by said party of the first part as additional capital.
Said party of the first part agrees that it will exact deferred payment contracts with unpaid balances equal to 110% of any loan, and that it will not extend credit in excess of One Hundred Fifty Thousand Dollars ($150,000) to any one corporation or individual.
Ten years was fixed as a reasonable time within which the corporation could acquire its own capital.
Investment by March 1923 had so little securities which would be accepted by the banks that petitioner entered into a supplemental contract with the corporation on March 5, 1923, by which further stocks and securities were transferred to it, subject to the same terms as those contained*1002 in the original contract of September 13, 1922.
*688 The stocks and securities conveyed to Investment by these two contracts had been acquired by petitioner after February 28, 1913, at an aggregate cost of $944,650, and at the time of their conveyance had a fair market value of $1,750,795, that being also the fair market value of the two contracts.
The financial history of Investment has already been set out in part. In May or June 1924 petitioner resigned from the board of directors and finance committee of the Federal Electric Co. Investment then had a large amount of Federal Electric Co.'s installment contracts, not due for several months, and petitioner did not wish it to invest in more. No more were bought by it. Petitioner became interested in various other concerns, and invested largely in foreign banks and corporations. He became a director and president of the W. A. Harriman Securities Corporation, organized in February 1929. Investment put $1,000,000 in that company. In 1923 Investment sold one of its assets for $1,200,000, invested the proceeds in 1924, and in 1927 made $8,000,000. Before that year it was financially unimportant.
About 1924 petitioner*1003 became a client of a Chicago law firm. He had then known one of the attorneys in the firm personally for many years. Petitioner mentioned to him the organization of Investment, and the attorney said he would have thought that petitioner would have gone outside the State of Illinois, and later, when petitioner came to him for legal advice, enlarged this view by pointing out the risks of taxation in that state under the capital stock tax, ad valorem personal property tax, and franchise tax. He suggested Delaware as a better State for corporate organization. Another lawyer in the same firm was at that time introduced to petitioner, who likewise sought to persuade petitioner to reincorporate elsewhere. Petitioner gave no particular heed, however, to these admonitions until some four or five years later, since he was a resident of Illinois, thought it a pretty good state, and found no evidence of tax abuse there.
When the petitioner became interested in the W. A. Harriman Securities Corporation in the spring of 1929, he removed his office to New York City, changing the office of the Illinois corporation, Investment, also to New York City. His attorneys in Chicago had continued*1004 to give petitioner their advice to reorganize Investment as a Delaware corporation. Before the petitioner's removal to New York City that company had grown to substantial size, and when he began to consider the taxation risks which he ran in Illinois with a corporation of only $6,000 capital stock and several million dollars of assets, he told these attorneys in 1929 to proceed to reorganize the company. Late in 1929 they proposed a plan of reorganization, the petitioner paying the lawyers' fees, but this plan was *689 never carried through. In the discussions between the petitioner and his attorneys a plan was sought which would effect a recapitalization of Investment and would also defer taxes under section 112 of the Revenue Act of 1928 on the termination of the petitioner's loan contract with Investment, which would occur about two years later. It was thought that this might be accomplished by capitalizing the contract as an asset in the hands of a new corporation. The petitioner's lawyers informed him that he could give to Investment his interest in the contract, then amounting to about $3,000,000, and by so forgiving the debt of the corporation, escape any taxation*1005 himself.
Petitioner's attorneys, pursuant to the original plan of reorganization which was not consummated, on November 6, 1929, organized through the Corporation Trust Co. three Delaware corporations - the Manistee Corporation, the Camrow Corporation, and the Inverness Corporation. While the petitioner was thinking over this plan, he became so involved with other activities in New York City that he told his lawyers to defer the matter, and the plan was abandoned on the petitioner's authority in the spring of 1930. Early in 1930 the petitioner visited a fellow director of the Harriman Securities Corporation, one Gossler, in Nassau in the Bahama Islands. He has since gone there once or twice a year. He was there introduced to a lawyer, one Solomon, who informed him that there was no annual corporation franchise tax, no license fee, and neither personal nor real property taxes in the Bahamas. The petitioner told Gossler that he intended to create a corporation in the Bahamas, and when he returned to New York in March or April 1930 he told his attorneys in Chicago of the same intention to form a Bahamian corporation to deal in foreign and domestic securities which would be adequately*1006 financed. On its being suggested to the petitioner by one of his counsel that this would be a good time to complete the reorganization of Investment, he told them to go ahead and prepare a comprehensive plan which would not only provide for the Bahamian corporation of which he had spoken, but also the reorganization of Investment along the lines previously suggested by his attorneys. Sometime about July or August 1930 one of the lawyers suggested a second Bahamian corporation, to which the petitioner acceded in September 1930. The petitioner and his counsel were agreed that the Illinois corporation, Investment, should be reincorporated and its capital readjusted at the same time.
The plan of reorganization was worked out by the petitioner's lawyers in detail in July or August 1930, submitted in writing to the petitioner and Solomon, and adopted by the petitioner. The plan itself was not put in evidence, but it contemplated the creation of the Inverness Corporation, under the laws of the Bahamas, through which *690 petitioner could carry on the business of buying and selling foreign and domestic securities; the conversion of the chose in action, the contract between the*1007 petitioner and Investment, into a capital asset of the Bahama corporation, and the reorganization of the Illinois corporation (Investment) into a Delaware corporation.
The first step taken in execution of the plan was to amend the certificate of incorporation of the Manistee Corporation, a Delaware corporation, created, as already stated, on October 26, 1929, which had since lain dormant, by changing its name to the Corporate Investment Co. of Delaware. This was authorized at a special meeting of the corporation's directors held on September 16, 1930, in Chicago, and done on September 18, 1930.
On September 25, 1930, the Inverness Corporation, Ltd., hereinafter called "Inverness" was organized under the Iaws of the Bahama Islands, with a corporate stock of Pound 2,000 represented by 1,000 shares of Pound 2 each. Solomon and four others subscribed one share each.
On September 25, 1930, the Camrow Corporation, Ltd., hereinafter called "Camrow", was organized under the laws of the Bahama Islands with a capital stock of Pound 3,000 represented by 1,500 shares of Pound 2 each. Solomon and four others subscribed one share each, 5 shares in all. Camrow was organized at the suggestion*1008 of the petitioner's counsel.
On September 20, 1930, the directors of Investment waived all notice of the special meeting of the directors to be held for the purpose of:
Considering the advisability of making an offer to transfer all the assets of this corporation to Camrow Corporation, Ltd., a corporation organized under the laws of the Colony of the Bahama Islands, subject to the liabilities of this corporation in exchange for 1000 shares of the capital stock of said Camrow Corporation, Limited, of a par value of Pound 2 per share.
This offer, being authorized by the directors and made by letter on the same day, was duly accepted at Nassau by Camrow, on October 7, 1930. At the same meeting of the directors of Investment held on September 20, 1930, the following was adopted:
Resolved * * * that in pursuance of and as a part of said plan of reorganization (using that phrase as the same is used in the Federal Revenue Act of 1928 of the United States of America), if, as and when said offer is approved by the stockholders of this corporation, and the said Camrow Corporation, Limited, accepts the proposal of this corporation to transfer all its assets to said Camrow Corporation, *1009 Limited, as hereinbefore authorized, in exchange for 1,000 shares of the capital stock of Camrow Corporation, Limited, that this corporation immediately distribute all of said stock received as a result of said reorganization to its sole and only beneficial stockholders, without the surrender by said stockholder of his shares of stock in this corporation, or without the surrender of the directions qualifying shares of stock.
*691 On the same day as the organization in the Bahamas of Camrow the stockholders of Investment held a special meeting in Chicago and ratified the action of their directors taken on September 20, as set out above, authorizing the transfer of Investment's assets, subject to its liabilities, to Camrow in exchange for the 1,000 shares of the latter's capital stock.
On September 29, 1930, Investment appointed Doris Louis Barlow its attorney in fact to receive the 1,000 shares of the capital stock of Camrow; to execute all bills of sale and assignments of Investment's assets to Camrow; to authorize Camrow to issue one share each to Barlow, Solomon, and two others, to endorse the remaining 996 shares to the petitioner, and to do other acts necessary. On*1010 the same day the petitioner appointed Barlow his attorney in fact to negotiate with Inverness and to enter into an agreement with it for the transfer to it of (1) the petitioner's interest in 203,548 shares of no par common stock of the Northern Utilities Co. (a Delaware corporation) and (2) in 66,500 shares of no par common stock of the same company then on deposit with the Central Trust Co. of Illinois, as trustee under a stock purchase warrant agreement of May 1, 1928, between the Utilities Purchasing Corporation, Northern Utilities Co., and Central Trust Co. of Illinois; (3) petitioner's interest in an option agreement from the Columbia Gas & Electric Corporation, a Delaware corporation, addressed to the petitioner, dated February 8, 1930, and granting to him the right to purchase 10,000 shares of common stock without par value of the Columbia Gas & Electric Corporation at $75 a share; and (4) the petitioner's interest in a contract between Investment and the petitioner, dated September 13, 1922, and its supplement, between the same parties. dated March 5, 1923, "and in and to all property, rights, privileges and obligations inuring to the owner of said contracts by reason of*1011 said ownership, for such amount of capital and upon such terms and conditions as my said attorney shall deem advisable and satisfactory." Barlow was further authorized to transfer to Inverness all the above described property, and to execute all deeds necessary thereto; to receive the consideration for the above property from Inverness; to authorize and direct Inverness to issue certificates for one share each of its own capital stock to Solomon, Barlow, and two others, which was "received as consideration as aforesaid"; to receive any certificates for Camrow's stock; and to vote all Inverness and Camrow stock in the petitioner's name as she should think proper.
Early in October 1930 one of petitioner's counsel, who had been in conference with the petitioner, arrived in the Bahamas, where he met Solomon by appointment and proceeded to carry through all requisite corporate steps to effect the purposes in mind. The minutes of the *692 several corporations had been prepared in advance in the office of petitioner's counsel in Chicago and they were duly signed by the several corporate officers in the Bahamas. All acts were done with the petitioner's knowledge and consent, and*1012 one of petitioner's Chicago attorneys personally saw to the execution of each transaction in the general plan.
On October 3, 1930, at the first general meeting of the shareholders of Inverness, Solomon was elected president, Stafford Sands vice president, and Alice Maude Farrington secretary and treasurer, the same being also elected directors. The registered office of the company was fixed at Nassau. On the same day the shareholders of Camrow held their first general meeting at the same offices and Solomon was elected president, Sands vice president, and Farrington secretary and treasurer, the same being also elected directors. Likewise the registered office of this company was fixed at Nassau.
On October 6, 1930, the directors of Inverness held a special meeting to consider an offer by the petitioner to transfer certain assets to Inverness in exchange for 1,000 shares of its capital stock. The offer was to transfer the Northern Utilities Co. common stock, the Columbia Gas & Electric Corporation option, and the two Investment contracts already set out. The offer was unanimously accepted by Inverness's directors and the company's officers were authorized to transfer to the*1013 petitioner 1,000 shares of the company's stock, it being "RESOLVED FURTHER, that said 1,000 shares shall include the beneficial ownership of the shares originally subscribed for, and that all of said 1,000 shares shall be fully paid and non-assessable." On the same day, Inverness issued stock certificates for 1 share each to Solomon, Sands, C. E. Robertson, Barlow, and Farrington, and for 995 shares to the petitioner.
On October 6, 1930, Camrow issued stock certificates of one share each to Solomon, Sands, Robertson, Barlow, and Farrington. On October 7, 1930, a special meeting of the board of directors of Camrow was called for considering an offer of Investment to transfer all its assets, subject to its current liabilities, in exchange for 1,000 shares of Camrow's capital stock; and also authorizing the issuance of such stock if Investment's offer should be accepted. The written offer, dated New York, September 30, 1930, from Investment to Camrow was presented, and resolutions were adopted by Camrow unanimously accepting the offer of exchange, authorizing the issue of 1,000 shares of the capital stock of a par value of Pound 2 a share and its delivery to Investment; and resolving*1014 further, that the 1,000 shares should "include the beneficial ownership of the shares originally subscribed for, and that all of said 1,000 shares shall be fully paid and nonassessable."
*693 On the same day, October 7, 1930, Barlow, attorney in fact for Investment, executed at Nassau in the Bahamas a bill of sale of "all the assets and property" of Investment, subject to its obligations and liabilities, to Camrow in exchange for 1,000 shares of the latter's stock thereby acknowledged. These 1,000 shares, which were all the shares of Camrow then issued and outstanding of its authorized 1,500 shares, were immediately thereafter transferred by Investment to the petitioner, Investment's sole stockholder, without the surrender by the petitioner of his stock in Investment, as authorized at Investment's diredtors' meeting of September 20 and its shareholders' meeting of September 25, 1930. These 1,000 shares of Camrow stock had a fair market value at the time of their transfer to the petitioner of $7,000,000.
On October 7, 1930, the directors of Camrow held a special meeting immediately after the adoption of the resolution above providing for the Investment exchange, for the*1015 purpose of considering making an offer to Inverness to cancel the contracts of September 13, 1922, and March 5, 1923, between the petitioner and Investment, which the petitioner had assigned to Inverness. A resolution was unanimously adopted that Camrow make an offer to Inverness to cancel the contracts on "the condition that this corporation be permitted to keep all the assets, profits and privileges accruing to said Charles A. Munroe, or his assignee, the Inverness Corporation, Limited, by virtue of their ownership of said contracts, and upon the payment by this corporation of 500 shares of the capital stock of this corporation of a par value of Pound 2 per share." And Camrow's officers were authorized on acceptance to make the transfer of shares.
On October 7, 1930, a few minutes after the above resolution was adopted by Camrow, the directors of Inverness met for the purpose of considering the offer and unanimously adopted it. The offer was made in the form of a letter from Camrow to Inverness, and, as in the case of the other intercorporation offers heretofore considered, was accepted by affixing at the end of the letter the attested signature of the officers of the offeree*1016 corporation. On the same day Inverness and Camrow executed at Nassau a formal agreement to transfer, respectively, the contracts, and the stock, reciting fully the consideration had and received and mutually releasing each other from any obligation arising out of the contracts transferred. On the same day Camrow issued a certificate for 500 shares of its capital stock to Inverness.
On the next day, October 8, 1930, Camrow's directors held a special meeting for "Considering the advisibility of making an offer to transfer all of the assets of this corporation to Corporate Investment Co. of Delaware, a Delaware corporation, subject to the liabilities of this corporation, in exchange for 10,000 shares of the capital stock *694 of said Corporate Investment Co. of Delaware of a par value of $10. per share"; and for authorizing an attorney in fact to act for it. Resolutions were thereupon adopted unanimously authorizing the appointment of such an attorney in fact to receive the certificates of 10,000 shares of the Corporate Investment Co. of Delaware's stock in exchange for Camrow's own assets, to do all acts necessary to effect the transfer, and to endorse the certificates of*1017 Investment of Delaware's stock received, 6,667 shares to the petitioner and 3,333 shares to Inverness. On the same day Camrow's shareholders ratified the action of the directors.
On the same day, October 8, 1930, an extraordinary meeting of the shareholders of Inverness was held at Nassau which approved the transaction between Inverness and Camrow with reference to the contracts of September 13, 1922, and March 5, 1923. A few minutes later, at noon of the same day, the directors of Inverness held a special meeting and adopted resolutions authorizing the petitioner to sell or exchange all stock or securities owned by Inverness at such prices as he should deem expedient, and likewise, to buy stock and securities for the corporation on the same terms; and authorizing Stafford Sands, vice president of the corporation, to carry out the petitioner's written or cabled instructions in these respects. On the same day Aubrey Kenneth Solomon tendered his resignation as president of Inverness, "as my services in connection with the incorporation and preliminary meetings * * * have been completed"; and Alice M. Farrington tendered her resignation as treasurer; and at an extraordinary meeting*1018 of the shareholders held shortly after noon on the same day these resignations were accepted, and the petitioner was elected president and also treasurer of Inverness and William A. Blind assistant secretary. Farrington continued as secretary.
On the following day, October 9, 1930, Camrow appointed Edward J. Ince of Chicago its attorney to receive for it certificates for 10,000 shares of the stock of Corporate Investment of Delaware, and to deliver to that corporation all bills of sale and other instruments necessary to transfer all the assets of Camrow to the Investment Corporation of Delaware; to endorse Investment of Delaware's certificates with instructions to issue new certificates to the petitioner and Inverness in the proportions already set out, and to receive these certificates for the petitioner and Inverness.
On October 14, 1930, the directors of Investment of Delaware held a special meeting in Chicago for considering an offer of Camrow to transfer all its assets to Investment of Delaware in exchange for 10,000 shares of the latter's stock at $10 per value a share, and for authorizing issuance of the stock, if the offer should be accepted. A resolution was unanimously*1019 adopted accepting the offer. Further provision was made for a declaration by the directors of Investment *695 of Delaware that Camrow's assets received in exchange should be of a value not less than the par value of Investment of Delaware's stock issued in exchange, and that of the consideration received $100,000 should be capital and the balance paid-in capital surplus. The first paragraph of the letter of offer from Camrow reads as follows:
Pursuant to proper action of the Board of Directors and stockholders of this corporation, the undersigned, in pursuance of a plan of reorganization (using that phrase the same as used in the Federal Revenue Act of 1928 of the United States of America), hereby offers to merge its property and business with your property and business by selling, transferring and delivering to you all the assets of the undersigned, subject, however, to the current liabilities of the undersigned, in exchange for 10,000 shares of the capital stock of your corporation, of a par value $10of per share, fully paid and nonassessable.
At another meeting of the directors of Investment of Delaware held on the same day the petitioner was elected a director and*1020 president.
On the same day, October 14, 1930, Investment of Delaware issued one certificate of 10,000 shares to Camrow. Camrow, by its attorney in fact, Ince, on the same day caused this certificate to be canceled and new certificates to be issued to the petitioner and Inverness in the proportion of shares already stated. On the same day Camrow, by Ince, executed a bill of sale to Investment of Delaware of "all the assets and property, real, personal and mixed, of the undersigned, and all right, title and interest of the undersigned in and to the same, subject however, to the liabilities and obligations of the undersigned."
On October 14, 1930, the day of the transfer by Camrow of its assets to Investment of Delaware, the latter's 10,000 shares of stock received in exchange had a fair market value of $9,627,968.39.
It was the intention of the petitioner's counsel who drew up the plan of the series of corporation transfers above set out that Camrow, having served its function, should be dissolved. This intention also appears from Camrow's minutes as early as October 17, 1930. This was done on February 9, 1931.
Inverness, since its organization in 1930, has continued to*1021 be a going and active company. Its corporate acts as disclosed in its minutes since that year may be summarized as follows:
On May 5, 1931, a resolution adopted by its shareholders declared a dividend of $60 per share on its common stock payable from surplus profits. A similar dividend in the amount of $86 per share was declared clared in November 1931. At the annual meeting of shareholders on September 20, 1932, the petitioner, as president of the company, reported that its operations for the past year had been "most unsatisfactory", that "practically no business was transacted", and that he recommended dissolution of the company if its business did not presently improve. In 1934 he made a similar report. Later, in 1934, *696 a dividend was declared of $20 per share on its common stock. On February 25, 1935, at a meeting of the shareholders and directors of the corporation, petitioner again reported that the business of the corporation during the past year had been unsatisfactory, that it had made no money, and that the greater part of its income from its capital investments had been distributed as dividends, and again suggesting the dissolution of the corporation unless*1022 its business became profitable. On May 1, 1936, petitioner's report to the company disclosed that during the year 1935 the company received as dividends and interest on bonds the sum of $131,728.74, that while no dividends had been paid that year the company had paid $145,000 on its note in the amount of $592,500 held by Investment of Delaware in connection with the purchase of certain debentures and stock of the W. A. Harriman Securities Corporation. On August 28, 1936, the directors of Inverness declared an interim dividend of $55,000 to its hsareholders payable out of earnings of approximately $60,000 in spite of the fact that there was a deficit in its surplus account of $384,905.23. Its only creditor, Investment of Delaware, consented to the payment of this dividend. On December 21, 1936, Inverness declared another dividend of $30 per share payable out of earnings, Investment of Delaware again formally consenting as its only creditor in view of its continuing deficit in surplus. At the annual meeting of Inverness on October 27, 1937, the petitioner, as president, reported that the company had received during the year $119,480.15 as dividends, $14,341.54 as interest on bonds, *1023 and $1,215.60 as profit from sale of securities, and that during the year it had paid $50,000 on its note to Investment of Delaware in the principal sum of $592,500, thereby reducing that loan to $367,500. At a meeting of the directors of the company on December 20, 1937, petitioner informed the meeting that the company's earnings for 1937 would be in excess of $100,000 and a dividend was declared in the amount of $93 a share. No further minutes of Inverness appear in the record.
The Corporate Investment Co. of Delaware since its organization has been an active and going corporation. It has declared and paid dividends as follows:
| May 5, 1931 | $155,000 |
| Nov. 20, 1931 | 400,000 |
| Mar. 26, 1934 | 100,000 |
| May 31, 1934 | 105,000 |
| Jul. 30, 1934 | 75,000 |
| Oct. 15, 1934 | 90,000 |
| Dec. 19, 1934 | 6,000 |
| Apr. 8, 1935 | 60,000 |
| Aug. 2, 1935 | $144,000 |
| Dec. 6, 1935 | 30,000 |
| Mar. 27, 1936 | 120,000 |
| Jul. 27, 1936 | 90,000 |
| Dec. 4, 1936 | 63,000 |
| Oct. 14, 1937 | 100,000 |
| Oct. 26, 1937 | 100,000 |
| Dec. 3, 1937 | 65,000 |
Petitioner has been indebted to this corporation in large amounts since its organization.
*697 OPINION.
KERN: The Commissioner has determined a deficiency in*1024 the petitioner's income tax for the year 1930 of $2,950,592.22, which result from the respondent's inclusion in the petitioner's gross income of $11,947,331.44, said to have been realized on the distribution to the petitioner in that year of two-thirds of the stock of the Corporate Investment Co. of Delaware and of one-third of its stock to the Inverness Corporation, Ltd., of which the petitioner was the sole shareholder. The total sum represents earned surplus of the Corporate Investment Co. of Illinois on October 6, 1930, $8,454,159.34, plus the liability of that company to the petitioner on certain contracts on the same day, $3,493,172.10; both of which were converted into stock of Investment of Delaware by certain intercompany transactions. The value of the stock of the several corporations on the dates of the corporate exchanges and the value of the contracts on the critical dates have been stipulated and are not in question here.
The principal question is whether the corporate exchanges in 1930 constituted a "reorganization" within the ambit of section 112(i) of the Revenue Act of 1928, set out in the margin, 1 and were thus tax-free. The Commissioner raises two additional*1025 questions, whether there was a liquidation of the Corporate Investment of Illinois in 1930, and whether in that year the petitioner realized gain on cancellation of the two contracts executed by petitioner and that company whereby Investment of Illinois was obligated to make certain payments to petitioner in 1932.
*1026 We have set out the facts fully in our findings and resume them here only for the sake of clarity in discussion of the legal questions.
In 1922 the petitioner organized Corporate Investment Co. of Illinois to buy installment paper. For $6,000 he became sole beneficial owner of its stock. He furnished additional capital to it under a contract of September 13, 1922, and its supplement of March 5, 1923, whereby he transferred to the corporation certain securities which were to be returned to him ten years later together with interest or dividends received thereon plus one-fifth of such interest or *698 dividends. After 1924 Investment of Illinois was used only as an investment company. In 1927 it earned a profit of around $8,000,000.
Petitioner's counsel as early as 1924 had suggested the reorganization of Investment of Illinois in another state in order to effect a recapitalization of that company under the laws of a state having a more favorable tax policy than Illinois, but it was not until the fall of 1929 that three new corporations, the Manistee Corporation, Camrow Corporation and Inverness Corporation, were organized in Delaware. The petitioner had removed to*1027 New York and his business there, complicated by the depression of 1929, occupied his mind to the exclusion of other affairs until 1930, when he was visiting the Bahamas and conceived the idea of organizing a corporation there which would engage in the business of buying and selling foreign securities with a minimum tax burden. He advised with counsel, who again suggested the reorganization of Investment of Illinois in connection with the formation of the Bahamian Corporation, and as a result a new plan was devised, new corporations were created, and the corporate exchanges in question took place.
The first step was to revive the dormant Delaware Corporation, Manistee, which was begun by changing its name of September 18, 1930, to Corporate Investment Co. of Delaware. Next came the creation of two corporations in the Bahamas, on September 25, the Inverness Corporation, Ltd., and Camrow Corporation, Ltd. The several exchanges followed. (1) On October 6, the petitioner transferred property, including his beneficial interest in the contracts of 1922 and 1923 with Investment of Illinois, to Inverness in exchange for all its stock. (2) On the next day, October 7, Investment of Illinois*1028 transferred all its assets subject to its liabilities to Camrow for 1,000 shares of the latter's stock, and distributed Camrow's stock to its own sole shareholder, the petitioner. Its liabilities included its obligations to petitioner under the two contracts. (3) On the same day, October 7, Inverness, holder of the petitioner's beneficial interest in the two contracts since two days before, canceled the contracts in exchange for 500 shares of Camrow's stock, thus vesting the full accrued proceeds of the contracts in Camrow free of any liabilities. The petitioner upon the completion of these acts owned immediately 1,000 shares or two-thirds of the total capital stock of Camrow, and mediately, as sole shareholder of Inverness, the beneficial interest in the remaining one-third of Camrow's stock, 500 shares. (4) An interval of a week was allowed to elapse before the final act which consummated the transaction. On October 14 Camrow transferred its assets, subject to its liabilities to Corporate Investment Co. of Delaware (the old revived Manistee Corporation of 1929) in exchange for all the latter's stock, 10,000 shares, which was at once distributed, *699 6,667 shares to the*1029 petitioner and 3,333 to Inverness, in the same proportion as that in which the petitioner and Inverness held Camrow's stock. Camrow thereafter was only an empty shell, having no assets, but its formal dissolution was postponed until February 9, 1931. The ultimate result was that the petitioner, from being sole shareholder of Investment of Illinois, was now a shareholder of two-thirds of the stock of Investment of Delaware and controlled, as sole shareholder of Inverness, the remaining one-third of that company's stock. The assets of Investment of Delaware were the same as the assets of Investment of Illinois but freed of any liabilities to petitioner on his contracts with the latter.
On this state of facts, the Commissioner earnestly contends that the case falls within the rule of . the rule of that case is that where a transfer of assets is made by one corporation to another not "in pursuance of a plan of reorganization" but in pursuance of a plan having no relation to the business of either, the purpose of which is not to reorganize a business or part of a business but being solely to consummate a plan to transfer property*1030 to a taxpayer in such a way as to decrease or avoid taxes, then such a transaction will not be considered as a "reorganization" within the meaning of section 112(i) of the Revenue Act of 1928. To state the rule conversely: Where such a transfer of assets is made in pursuance of a plan of reorganization which has a definite relation to the business of both corporations, the primary purpose being to reorganize a business and not solely to effect a transfer of property to a taxpayer in such a way as to decrease or avoid taxes, the transaction will be considered as a "reorganization" within the meaning of the act, even though one of the purposes and results of the transaction is to minimize taxes. The holding of that case was that under the facts presented there had not been a reorganization within the meaning of the act.
However, the facts of that case are clearly different from those here. There the new corporation, Averill, was brought into existence solely for the purpose of acquiring the Monitor shares and distributing them to the petitioner. It was kept alive only three days, within which this purpose was accomplished. It was not an "enduring" corporation, cf. *1031 , but one created solely to evade taxes. Here, on the other hand, petitioner intended to dissolve the Illinois corporation and transfer its assets to a corporation organized in a state having less onerous corporate taxes. Investment of Delaware served that purpose. As the evidence shows, the Delaware Corporation was created before the scheme of the Bahamian corporations was thought of. It was created as the Manistee Corporation of Delaware in the fall of 1929 and, when the *700 reorganization scheme was worked out and carried into execution in the fall of 1930, its name was changed and it was used, as originally intended, to receive the assets of Investment of Illinois. The fact that certain intermediate corporate exchanges took place does not affect or vitiate the ultimate purpose to transfer to a Delaware corporation assets previously held in an Illinois corporation. Here also, Inverness, the Bahamian corporation called into existence for the purpose, among others, of effecting the transfer of the petitioner's beneficial interest in the contracts through Camrow to Investment of Delaware, remained in existence, *1032 holding one-third of Investment of Delaware's stock. It also held other stock and an option transferred to it by petitioner, and not conveyed by it to Camrow. Its existence would have been none the less real if the plan had provided that Inverness be only a holding company. . Nor is it material that Camrow was only a conduit for assets going to Investment of Delaware, for in doing so, it served a business purpose vital to the reorganization and inherent in the plan; and it is not necessary that the "business purpose" of every corporation shall be strictly commercial. The assets of Investment of Illinois, including the proceeds of the contracts, ultimately were transferred to Investment of Delaware, freed of the contract burden, and petitioner after the transfer held the stock of Investment of Delaware, which partially represented the chose in action under the contracts it had previously held against Investment of Illinois. A reorganization of Investment of Illinois had taken place, but petitioner's interests still remained in solution. Nothing was cut off and distributed to him which*1033 could be said to be a realized gain, the withdrawal for his separate use of any asset formerly in the original company. He had stock in Investment of Delaware representing the same assets as those held by Investment of Illinois.
We think that the series of transactions should be viewed as a whole, embodying merely steps in the execution of a single plan. That this was intended is obvious, and although no written plan was put in evidence, it is obvious that there was a plan of reorganization and what that plan was. One of its purposes was to defer realization of income on the contracts, with two years still to run at the time of the plan's execution, until some future date. However, there were other purposes of the plan. Looking at the transactions as a whole, as steps in a single plan, we must conclude that the ultimate purpose was the reorganization of Investment of Illinois and the transfer of its assets to a Delaware corporation and a Bahamian corporation, with the assets freed of the contractual obligation to Munroe.
*701 We are of the opinion that the new corporations, Inverness and Investment of Delaware, were real and organized for a legitimate business purpose, *1034 and that the principle of , therefore, has no application. What was sought to be accomplished by the plan was carried out as a reorganization within the intent of section 112(i).
We have set out fully in our findings the fact of Inverness's dividends from which respondent infers that that corporation did not have a profitable business and hence was a mere sham device which would enable the petitioner as sole shareholder to "siphon off" at will its accumulated gains. A like argument on similar grounds is made in respect to Investment of Delaware. It is not disputed that both Inverness and Delaware were going and operating companies since 1930. The fact that during some years subsequent to 1930 these companies did not have a profitable business and the fact that one of them paid dividends out of earnings in spite of the presence of a corporate deficit are not so unusual as to cause an inference that these corporations were shams. It has never been suggested that reorganizations must be profitable in order to be considered as reorganizations within the meaning of the revenue act.
We turn now to respondent's argument that there*1035 was a liquidation of Investment of Illinois, which rests, apparently, upon the theory that petitioner contributed the assets in 1922 to Investment, not under contract to return them or their proceeds within ten years, but as a capital contribution; and that Investment transferred in 1930 all its assets to Camrow in exchange for all of Camrow's stock and then distributed the stock to its sole shareholder, the petitioner, without the surrender by petitioner of any of his shares in Investment. We find this argument irrelevant in the light of our conclusion that the Investment-Camrow exchange was part of a reorganization. Such it was under section 112(g), and it is immaterial whether or not Investment of Illinois was liquidated in the course of this general transformation. ; , affirming .
Nor do we find more in point respondent's final contention that the cancellation of the contracts resulted in taxable income of $3,493,172.10 to the petitioner. This appears to be alternative and contradictory to the second contention, just noticed, since*1036 it assumes the validity of the contracts. The beneficial interest in the contracts was a chose in action, "property", which petitioner might transfer to Inverness solely for stock without recognition of gain or loss, under section 112(b)(5), as we have already pointed out. Inverness in turn transferred this asset to Camrow for stock, which, as we have *702 said, might properly be done. We are unable to find any similarity between this situation and that in , affirming , to which respondent likens it. There personal service contracts were involved; here the contracts were for the earnings from property, from the securities which petitioner had transferred to Investment of Illinois. The distinction is elemental in tax law. As we have already said, the transfer of Inverness's chose in action to Camrow in exchange for stock, an act which freed the contract proceeds in Camrow's hands from liabilities, resulted in no income to Camrow, for Camrow parted with its capital stock to obtain its release; and, obviously, to no income to Inverness, which acquired Camrow's stock in exchange for the property*1037 represented by its contract; nor to petitioner, whose interest in the contracts still remained in solution through the substitution therefor of Camrow's stock and of Inverness's stock. We are unable here again to find any income realized by petitioner through the "cancellation" of the contracts.
Reviewed by the Board.
Judgment will be entered under Rule 50.
Footnotes
1. (i) Definition of reorganization. - As used in this section and sections 113 and 115 -
(1) The term "reorganization" means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation), or (B) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred, or (C) a recapitalization, or (D) a mere change in identity, form, or place of organization, however effected.
(2) The term "a party to a reorganization" includes a corporation resulting from a reorganization and includes both corporations in the case of an acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation. ↩