*260 Decisions will be entered under Rule 50.
1. Petitioner, the sole active stockholder, owning 25 per cent of the capital stock in a corporation, bought all of the stock in order to liquidate the corporation and operate the business as a sole proprietorship. He paid substantially more for the stock than the known fair market value or book value of the tangible assets. Following the purchase of the stock he immediately liquidated the corporation. The corporation had no intangible assets. Held, petitioner realized a long term capital gain based on the difference between the original cost of his 25 per cent of the stock and the fair market value of a 25 per cent interest in the tangible assets.
2. Held, further, that the purchase of the stock and liquidation of the corporation were in substance a purchase of the corporation's assets, from which petitioner realized no capital loss.
*368 These proceedings, consolidated for hearing, involve deficiencies in income tax as follows:
| 1943 | 1944 | 1945 | |
| Ruth M. Cullen | $ 1,260.86 | $ 407.66 | $ 651.19 |
| Charles C. Cullen | 1,260.86 | 417.19 | 636.20 |
The deficiencies arise from respondent's determination of an additional long term capital gain on the liquidation of a 25 per cent interest acquired in 1931 and the disallowance of a short term capital loss on a 75 per cent interest in the stock of a corporation which was acquired immediately prior to liquidation in 1943.
*369 Some of the facts were stipulated and are so found. The stipulation filed is incorporated herein by reference.
FINDINGS OF FACT.
The petitioners are husband and wife, residing in Seattle, Washington. They filed separate income tax returns on the community income basis for each of the years here*262 involved with the collector of internal revenue for the district of Washington.
Charles C. Cullen, hereinafter referred to individually as the petitioner, has been engaged in the business of manufacturing, selling, and servicing orthopedic appliances and artificial limbs since 1921. The petitioner entered the orthopedic appliance business as an apprentice with the A. Lundberg Co. of Seattle, and was employed by that company ten years. During the latter part of his employment with the A. Lundberg Co. the petitioner represented it in its dealings with the medical profession and became acquainted with the orthopedists in Seattle.
In 1931 the petitioner, H. T. Buckner, an orthopedist, Barney O'Connor, a druggist, and Stanley Long, an attorney, organized the True Appliance Co., a Washington corporation, for the manufacture and sale of orthopedic appliances. Each stockholder contributed $ 750 in cash to acquire a one-fourth interest in the corporation. Shortly after its formation the corporation changed its name to "Cullen and Company" and then to "Charles C. Cullen and Company." The corporation acquired the business of a defunct appliance firm on the second floor of the Medical-Dental*263 Building in Seattle, leasing 1,200 square feet of floor space at a monthly rental of $ 125. Later, the floor space was increased to 3,000 square feet at a monthly rental of $ 300. The premises were originally leased for 3-year periods, with renewal options, but after 1940 the lease had no option regarding renewal. Thereafter, the renewal of the lease was subject to negotiations between the landlord and the corporation, as tenant.
The business of Charles C. Cullen & Co. was largely a "prescription business," depending to a great extent upon the referral of patients by orthopedists for the purchase of orthopedic appliances. A minor part of the business was the manufacture and sale of artificial limbs. Some of the artificial limb business was prescription business, but some advertising was done in connection with this part of the business and customers were periodically contacted from customer lists maintained by the corporation. Most of the work on orthopedic appliances was done by hand, only light manufacturing equipment such as saws, buffing wheels, and drills being used. In 1931 the corporation had four employees, including the petitioner. In 1943 there were twenty-four employees. *264 All the employees were hired or *370 supervised by the petitioner and many of them were trained by him. The employees were loyal to petitioner and assured him they would follow him if he should ever leave the company.
None of the stockholders other than petitioner contributed anything to the business beyond their original capital investment. Their connection with Charles C. Cullen & Co. was not publicly known. So far as was publicly known, Charles C. Cullen & Co. was the enterprise of the petitioner, since he was the only representative of the business in its dealings with the orthopedists and the corporation's customers and devoted his entire time to the business from its inception. The other shareholders did not participate actively in the business at any time.
The corporation paid its first dividend in 1935 and continued to pay dividends thereafter in every year to and including 1943. Dividends in the aggregate sum of $ 63,565.80, or $ 15,891.45 to each stockholder, were paid during the life of the corporation. In 1931 the petitioner received a salary of $ 45 per week. This was increased until he was receiving compensation at the rate of about $ 5,000 per year in 1943.
*265 In October, 1942, the petitioner enlisted in the Army at the request of Dr. Buckner to act as a medical specialist in making artificial appliances. When the petitioner found this position unavailable to him in the Army organization, he requested release from service and was discharged in March, 1943. Prior to leaving his business for the Army the petitioner received the assurance of the medical profession in Seattle that his firm would continue to receive their business. During the petitioner's absence the business was operated satisfactorily by petitioner's office manager.
After petitioner's return to the business in March, 1943, the personal relationship between him and the other stockholders became strained. As a result of this situation and of petitioner's dissatisfaction with his compensation for his services to the corporation, the petitioner began to consider terminating his connection with the corporation. At about this time the owner of A. Lundberg & Co., with which the petitioner had formerly been employed, offered to sell one-half of the business to petitioner for $ 10,000 and to retire from active participation in the business.
The petitioner conferred with John Sparling, *266 his financial adviser and accountant, about his situation. As a result of this conference, the petitioner decided to make an offer to the shareholders of Charles C. Cullen & Co., either to buy their interest in the business or to sell his interest to them. Sparling, representing the petitioner, offered to buy the stock of the other stockholders of the corporation for the book value of the stock, plus an additional sum amounting to their three-fourths share of the business profits for 1943, estimated at about $ 15,000, or to sell the petitioner's stock to the other stockholders for *371 its book value at that time. The petitioner made the above described offer to the other stockholders on the advice of Sparling that if he did not buy out the other stockholders in the corporation he would lose the value of his interest in the corporation and could also acquire only a one-half interest in the A. Lundberg Co., about two-thirds the size of his own corporation, for an additional $ 10,000. Sparling also acquainted the petitioner with the potential savings to be effected by dissolving the corporation after acquisition of the stock and eliminating corporate income and excess profits*267 taxes.
The other stockholders agreed, although reluctantly, to sell their stock to petitioner and on September 7, 1943, the petitioner and his wife bought the other stockholders' 75 per cent of the capital stock of the corporation. The petitioners paid $ 31,607.25 for the stock. The book value of all tangible assets of the corporation on that date was $ 23,206.42.
On the same day that the petitioners acquired all of the stock of the corporation they dissolved the corporation and caused all the assets to be distributed to themselves. Thereafter, as a marital community under the laws of Washington, they operated the business as a sole proprietorship.
The petitioners in their separate income tax returns for 1943 claimed a short term capital loss on the 75 per cent interest in Charles C. Cullen & Co. to the extent the price paid for the stock exceeded the book value of 75 per cent of the tangible assets of the company which they received upon dissolution of the corporation. The respondent, in addition to some minor adjustments of the petitioners' returns which are not contested here, determined that upon dissolution of the corporation the petitioners received tangible assets having*268 a fair market value of $ 23,206.42 and intangible assets having a fair market value of $ 18,936.58, a total value of $ 42,143. He disallowed the short term capital loss claimed by the petitioners upon the 75 per cent of the stock acquired from the other stockholders, and also asserted an additional long term capital gain upon the 25 per cent of the stock previously held by petitioner. The respondent, consistently with the above described action, disallowed the net capital loss carry-over deductions claimed by the petitioners in their returns for 1944 and 1945, as the result of the capital loss claimed by them upon the Charles C. Cullen & Co. stock in 1943.
The book value of the tangible assets of Charles C. Cullen & Co. upon dissolution was $ 23,206.42. The corporation had no intangible assets of value upon dissolution.
OPINION.
The first question we must determine is whether respondent erred in his determination that the petitioners received *372 assets having a fair market value of $ 42,143 upon the liquidation of Charles C. Cullen & Co., a corporation in which the petitioners were the sole stockholders.
The petitioners contend that the payment of an amount in excess of *269 the book value of the stock does not establish a fair market value for the assets of the corporation because the tangible assets had no value in excess of their book value and the corporation had no intangible assets of value. Respondent accepts the book value of the tangible assets as the fair market value of those assets, but argues that the amount which petitioners paid in excess of the book value of the tangible assets for the stock was paid for the intangible assets of the corporation and is the best measure of their fair market value.
To support their argument that the corporation had no intangible assets of value, the petitioners have produced evidence that the petitioner himself, for all practical purposes, was Charles C. Cullen & Co. He alone of the stockholders participated actively in the business. He brought with him into the corporation, and later procured, most of its customers. He alone represented the corporation in dealing with the orthopedists by whom most of the customers were referred. He hired, and in many cases trained, the employees. The petitioner had the assurance of most of his employees, none of whom were under contract with the corporation, that they*270 would follow him if he left the corporation. We have no doubt that most, if not all, of the doctors who furnished the customers to the business would have "followed" him if he had left the corporation. The name and location of the corporation had no value other than for their connection with the petitioner himself. The personal ability, personality, and reputation of Charles C. Cullen as an individual did not belong to the corporation as intangible assets, since he had no contractual obligation to continue his connection with it. Cf. D. K. MacDonald, 3 T. C. 720; Howard B. Lawton, 6 T.C. 1093">6 T. C. 1093; reversed on other issues, 164 Fed. (2d) 380. Neither could the personal ability of the other employees of the corporation be considered assets of the corporation, since they were also free to leave the corporation at any time and no doubt would have done so had the petitioner asked them.
We conclude that the petitioner did not acquire any intangible assets of the corporation in the form of good will or otherwise when he purchased all of the stock held by the other stockholders. The gain which the petitioners*271 realized upon the 25 per cent of corporate stock originally issued to them is the amount by which the fair market value of 25 per cent of the tangible assets exceeded the original cost of the stock, 1 and the Commissioner erred in adding any intangible *373 asset value. It does not follow, however, that the petitioner sustained a short term capital loss upon the stock in the amount he paid to the other stockholders in excess of the book value of their stock by merely going one step further and dissolving the corporation, taking the assets of the corporation at their book value in exchange for the stock.
*272 The petitioner knew the value of the corporation's assets before he offered to buy the remaining stock. As the result of his conclusion that he would not continue his former relationship with the corporation, he considered both the possibility of buying a partner's interest in a competing business and the possibility of buying out the other stockholders in the corporation. On the advice of his financial adviser and accountant he determined to follow the latter course, relying upon the savings in taxes, resulting from dissolution of the corporation, and upon increasing his share in the earnings of the business to reimburse him for the cost of buying out the other stockholders. He agreed to buy the other stockholders' stock at the book value of their stock, plus their usual share of the estimated earnings of the corporation for 1943, or to sell his stock to them at its book value. The petitioner's purpose was not to buy their stock as such. It was to buy up the business and the right to operate it as his own without interference from the former majority stockholders and without obligation to continue paying to them what he regarded as more than their rightful share of the earnings*273 of the business. If he failed to do that, the petitioner intended to get out of the business himself. This right to operate the business as sole proprietor was not an asset of the corporation. However, it was an important and valuable right to the petitioner. It motivated his entire action. Petitioner's purpose in buying the stock was to liquidate the corporation so that he could operate the business as a sole proprietorship. The several steps employed in carrying out that purpose must be regarded as a single transaction for tax purposes. Prairie Oil & Gas Co. v. Motter, 66 Fed. (2d) 309; Helvering v. Security Savings & Commercial Bank, 72 Fed. (2d) 874; Commissioner v. Ashland Oil & Refining Co., 99 Fed. (2d) 588; certiorari denied, 306 U.S. 661">306 U.S. 661; Kimbell-Diamond Milling Co., 14 T.C. 74">14 T. C. 74.
The petitioner paid more than the book value or fair market value of the assets in order to purchase the stock without delay and without increasing the already present strain on the personal relations of the stockholders. After *274 acquiring the stock and dissolving the corporation pursuant to his plan, he had neither more nor less than he had paid for. As to whether the petitioner could have bought the stock for less than he paid, we venture no opinion. We do conclude that he *374 had, after the liquidation of the corporation, everything he had paid for when he bought all of the corporation's stock. He sustained no loss on the transaction.
It follows that the respondent's disallowance of the capital loss carry-over claimed by the petitioners under section 117 (e) (1), Internal Revenue Code, 2 for the years 1944 and 1945 was correct.
*275 Decisions will be entered under Rule 50.
Footnotes
1. SEC. 115. DISTRIBUTIONS BY CORPORATIONS.
* * * *
(c) Distributions in Liquidation. -- Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined under section 111, but shall be recognized only to the extent provided in section 112. * * *↩
2. SEC. 117. CAPITAL GAINS AND LOSSES.
* * * *
(e) Capital Loss Carry-Over. --
(1) Method of computation. -- If for any taxable year beginning after December 31, 1941, the taxpayer has a net capital loss, the amount thereof shall be a short-term capital loss in each of the five succeeding taxable years to the extent that such amount exceeds the total of any net capital gains of any taxable years interventing between the taxable year in which the net capital loss arose and such succeeding taxable year. For purposes of this paragraph a net capital gain shall be computed without regard to such net capital loss or to any net capital losses arising in any such intervening taxable years.↩