Park & Tilford v. Commissioner

PARK & TILFORD, PETITIONER, ET AL., ¹v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Park & Tilford v. Commissioner

Docket Nos. 89181, 89182, 89184-89195, 94024-94069.

United States Board of Tax Appeals

43 B.T.A. 348; 1941 BTA LEXIS 1513;

January 16, 1941, Promulgated

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Pursuant to contract dated June 9, 1933, Corporations A and B, on June 30, 1933, transferred certain of their assets to Corporations Y and Z, respectively, wholly owned subsidiaries of Corporation X, in exchange for stock and debentures of X, and immediately distributed the stock and debentures received to their stockholders, Corporations C and D, respectively. Previously, on June 23 and 24, respectively, A and B had transferred their assets not covered by the contract of June 9 to C in exchange for the stock of C, and immediately after the transfer of such assets by B on June 24 B was in control of C. On June 28 B, in partial liquidation or as a step in complete liquidation, distributed to its sole stockholder, D, the stock of C. On or immediately following June 30, 1933, Corporations A, B, and D were completely liquidated and their assets were received in varying proportions by the petitioners herein. Distributions in liquidation were also made by C to petitioners herein and by the end of January 1935 it was insolvent and no longer had assets sufficient to meet its liability for income and excess profits taxes. Held:

(1) That the stock and debentures of Corporation X received by Corporations A and B upon the transfer of their assets to Corporations Y and Z, respectively, were not the securities of a corporation a party to a reorganization within the meaning of section 112(b)(4) of the Revenue Act of 1932. Groman v. Commissioner, 302 U.s. 82; Helvering v. Bashford,302 U.S. 454">302 U.S. 454; Michigan Steel Corporation of New Jersey,38 B.T.A. 435">38 B.T.A. 435.

(2) That the transfer of assets by Corporation B to Corporation C for stock of C was a reorganization under section 112(i)(1)(B) and the distribution by B to D of the stock of C was without recognition of gain.

(3) That the stock and debentures of Corporation X not being the securities of a corporation a party to a reorganization, the gain realized by Corporations C and D upon the distribution to them of the stock and debentures of X, in liquidation of Corporations A and B, respectively, does not escape recognition under section 112(b)(3).

(4) That the excess profits tax is not unconstitutional and Corporations A, B, and C are liable therefor under the provisions of section 216 of the National Industrial Recovery Act.

(5) That Corporation D was not carrying on or doing business during any part of the period from June 16 to June 30, 1933, and is not liable for excess profits tax.

(6) On the facts in these proceedings, the statute of limitations has not operated to extinguish the liability of the petitioners as transferees of A, B, C, and D.

Hugh Satterlee, Esq., William R. Green, Jr., Esq., and Philip Zimet, Esq., for the petitioners.

J. R. Johnston, Esq., for the respondent.

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TURNER

The respondent determined the following deficiencies in tax for 1933 with respect to the named corporations:

	Income tax	Excess Profits tax
Lorraine Corporation, formerly Large Distilling Co	$288,175.40	$104,784.80
Oldham Corporation, formerly A. Overholt & Co	569,030.63	216,732.16
Geneva Corporation	214,830.25	64,147.03
Overholt Distributing Co	1,174,830.26	427,204.75

The respondent further determined that the petitioners were transferees directly or indirectly of assets of one or more of said corporations and proposed to assess certain amounts of the taxes plus interest against them as transferees of assets of said corporations.

The issues presented are (1) whether certain transactions occurring about the middle of 1933 constituted reorganizations within the meaning of the statute; and if not, what the correct amount of tax of each of the above named corporations is, (2) whether the corporations were subject to excess profits taxes for 1933, (3) whether the statutory period for assessment of the said taxes against the petitioners as transferees had expired prior to the mailing of the deficiency notices herein, and (4) whether the petitioners have any liability at law or in equity, as transferees of property of the Large Distilling Co., A. Overholt & Co., the Geneva Corporation, or the Overholt Distributing Co., in respect of the taxes herein.

FINDINGS OF FACT.

A. Overholt & Co., a Pennsylvania corporation, sometimes referred to as Overholt, was incorporated in July 1907; the Overholt Distributing Co., a New York corporation, sometimes referred to as Distributing, was incorporated in July 1925; the Large Distilling Co., a Maryland corporation, hereinafter referred to as Large, was incorporated in December 1930; and the Geneva Corporation, a Pennsylvania corporation, sometimes referred to as Geneva, was organized about June 14, 1933.

Overholt's business was that of distilling whiskey. In the early part of 1933 its assets consisted of a distillery, an inventory of whiskey, brands, and other incidental assets, including a majority of the outstanding shares of stock in Large.

About the time of its organization Large acquired a distillery business consisting of a distillery, brands, good will, and an inventory of whiskey which was subject to an optional contract of sale to the Schenley Products Co., hereinafter referred to as Schenley, and other incidental property. No distilling had been done at the distillery since 1921 and the expenditure of a considerable amount of money would have been required to put it in condition for operation. By the early part of 1933 a portion of the whiskey acquired by Large at the time of its organization had been delivered to Schenley, but the balance was subject to delivery over a period of years. By a contract between Large and Overholt entered into on January 2, 1931, Large was entitled to one-half of the net profits derived by Overholt from the sale of all whiskey distilled by Overholt after 1930. The plants of Overholt and Large were located in Pennsylvania and were about forty miles apart.

Distributing owned all the outstanding stock of Overholt, which stock had been acquired by Distributing shortly after its organization in 1925. It had no other assets except the outstanding stock of the West Overton Distilling Co., which company had no assets of consequence and the stock of which had only a nominal value. D. A. Schulte, Inc., a New York corporation, hereinafter referred to as Schulte, owned 70 percent of the outstanding stock of Distributing.

The National Distillers Products Corporation, a Virginia corporation organized in April 1924, hereinafter referred to as National, had been a holding company from the time of its organization and had never engaged in business operations except through subsidiaries, of which it had 30 on and prior to June 30, 1933. The operations of the subsidiaries were generally supervised and controlled through the general office of National in New York City.

For some time National had been interested in acquiring certain properties of Large and Overholt. About 1930 it made an offer of $5,500,000 for the properties, to be paid in securities of National, which offer was rejected. For several months prior to May 26, 1933, National was again negotiating for the properties in question, the negotiations being conducted between Porter, National's president, and Schulte. National desired to acquire Large and Overholt as going concerns but was insistent that the properties when acquired should be free from the debts or obligations of their former owners. On or prior to May 26, 1933, the negotiations culminated in a tentative agreement for the acquisition of the desired properties in consideration for 102,000 shares of common stock in National and $600,000 par value of its debentures. On May 26, 1933, the directors of National, being advised of the status of the negotiations and having received an appraisal of the desired properties showing an appraised value therefor of $7,601,645, agreed that the said properties would have a value to National of at least $6,720,000 and authorized Porter to enter into a contract with Schulte for the acquisition of the properties for the consideration previously and tentatively fixed, namely, 102,000 shares of the common stock of National and "cash or obligations" of National in the amount of $600,000.

It had been the desire of Schulte that National acquire the stock of the two corporations so as to avoid the taxation of Large and Overholt on their profits from the transaction, but National would not agree to a purchase of the stock, giving as a reason therefor that it was fearful of the Clayton Act. National was also unwilling to assume the liabilities of Large or take over its whiskey inventory which was subject to the optional contract of sale with Schenley.

Fearing the possibility of multiple taxes if the properties and not the stock of Large and Overholt were disposed of, Schulte consulted counsel and was advised that the disposition of the assets of Large and Overholt in the manner hereinafter described would constitute a reorganization within the meaning of the income tax statute and the gain therefrom would not be recognized.

A problem arose as to a proper apportionment between Large and Overholt of the total consideration to be received from National and it was concluded that the minority interest in Large had a value equal to one-sixth of the total value of the Large and Overholt properties and would be entitled to one-sixth of the proceeds received from their disposition. Since the tentative agreement between National and Schulte provided for the disposition of only a portion of the assets of Large and of Overholt, a discussion arose as to the best way of desposing of the other assets of those corporations. The devising of a method for disposing of such other assets was left largely to counsel, who decided that a new corporation should be formed to liquidate those assets and that the minority stockholders of Large should receive one-sixth of the stock of such corporation. Geneva was the corporation subsequently formed for that purpose.

During the period beginning about May 20, 1933, there was a series of conferences between Schulte and counsel and successive drafts of a "Plan of Reorganization" were made. The first was dated May 29, 1933, a revision was dated June 7, 1933, a subsequent revision was dated June 16, 1933, and a final draft was made sometime between June 23 and June 30, 1933. The "plan", as finally drafted, provided for the organization of Geneva for the transfer to Geneva by Large (subject to its liabilities) of the assets of Large which National did not desire, in exchange for stock of Geneva, which Large would then distribute to its stockholders; for the transfer to Geneva by Overholt (subject to its liabilities) of the assets of Overholt which National did not desire, in exchange for a further issue of stock by Geneva, which stock Overholt would thereupon distribute to its sole stockholder, Distributing; for the subsequent issue by National of 29,582 shares of its stock and $174,000 principal amount of its debentures to Large in exchange for the transfer of the desired assets of Large to National, or its nominee, the said exchange to be followed by the distribution of such stock and debentures by Large to its stockholders and thereafter by the dissolution of Large; for the issue by National of 72,418 shares of its stock and $426,000 principal amount of its debentures to Overholt in exchange for the transfer of the desired assets of Overholt to National, or its nominee, the said exchange to be followed by the distribution of such stock and debentures by Overholt to its sole stockholder, Distributing, and thereafter by the dissolution of Overholt; for the partial or entire liquidation of Distributing by the distribution to its stockholders of the Geneva stock and National stock and debentures to be received from Overholt and for the liquidation of Geneva by the distribution to its stockholders of the National stock and debentures to be received by it in liquidation of Large; also the distribution of its other assets as fast as such assets should be converted into cash. Each of the three earlier drafts, like the fourth, contained provisions for the transfer, either to National or to its nominee or nominees, of the desired assets of Large and Overholt.

On June 9, 1933, Schute and National executed a formal contract, sometimes referred to as the Schulte-National agreement, respecting the desired assets of Large and Overholt. The contract contained among others the following provisions:

WHEREAS, National desires to acquire certain of the assets of Overholt and Large, including 31,000 barrels of rye whiskey owned by Overholt, distilled since January 1, 1930, and the distillery and warehouse plants and all other real estate of both Overholt and Large, together with the machinery and equipment in, on and used in connection with, or in any way appurtenant to, said distilleries and warehouse plants, and each of them, together with the names, good will, brands, trade names and trade marks of Overholt and Large, together with such other assets of Overholt and Large as are hereinafter described as being included in the transfer hereinafter provided for; and

WHEREAS, Schulte is willing to enter into this agreement to cause the assets of Overholt and Large hereinafter referred to to be transferred to National on the terms and subject to the provisions and conditions hereinafter contained in exchange for stock and securities of National, in pursuance of a plan or plans of reorganization.

NOW, THEREFORE, this agreement WITNESSETH:

1. Schulte hereby agrees to cause to be transferred and conveyed to National (a) all of the real estate, buildings, machinery and equipment, owned by Overholt and Large, including the distilleries and warehouse plants of said corporations and any machinery and equipment appurtenant thereto, together with the names, good will, brands, trade names and trademarks of Overholt, Large and West Overton, (b) 31,000 barrels of rye whiskey, distilled by Overholt for its account after January 1, 1930 and now located at the warehouse of Overholt, in Fayette County, Pennsylvania, and (c) all supplies, trade records and correspondence, belonging to Overholt and Large at the date of the transfer of assets pursuant to this agreement except as hereinafter provided.

2. The real property to be conveyed pursuant to this agreement shall include all of the real property of Overholt and Large * * *.

3. * * * (c) Schulte agrees to cause the names of the corporations Distributing, Overholt, Large and West Overton to be changed to names satisfactory to National, as to each corporation, at such time and in such manner as soon as practicable after the conveyance and transfer of assets pursuant to this agreement, as may be requested by National, and to execute any and all consents or similar documents necessary or convenient to the use of such names by National to the end that National may have the full future exclusive use and benefit of such names and the use thereof by itself or by a corporation or corporations to be formed by National as wholly owned subsidiaries. * * *

* * *

5. The transfer to be made pursuant to this agreement shall be subject to the approval of any and all governmental officials whose consent or approval may be necessary to the end that National shall be legally entitled to acquire, use and/or dispose of the property transferred * * *. National shall endeavor in good faith to obtain all necessary consents and approvals to such conveyance and transfer. Schulte agrees to use its best efforts and to cause Distributing, Overholt and Large to use their best efforts in assisting National in obtaining such consents and approvals, so far as it or they may be requested so to do by National. * * *

* * *

8. Schulte agrees to place in escrow or cause Overholt and Large to place in escrow, under an escrow agreement containing usual and reasonable provisions in form satisfactory to the counsel for the parties hereto, 2,000 shares of the stock of National forming a part of the consideration for the transfer of assets pursuant to this agreement as hereinafter provided, with the right to substitute $100,000 in Liberty or other United States Government Bonds in lieu of said 2,000 shares of common stock of National, as security to indemnify National and hold it harmless for a period of three years from the date of the transfer of assets pursuant to this agreement against any and all loss, damage or expense by reason of any claim arising through any outstanding warehouse receipts at any time issued by Overholt, Large and/or West Overton, or by any other corporation or person on behalf of any of said named corporations and not arising through any act of omission or commission on the part of National, its subsidiaries, successors or assigns; * * *

* * *

11. In consideration of the representations and agreements herein contained, and subject to the terms and conditions of this agreement, National agrees to acquire the property hereinbefore provided to be transferred and conveyed and in consideration therefor to deliver to Overholt 72,418 duly authorized full paid and nonassessable shares of the common capital stock of National and $426,000 principal amount of the debentures of National hereinafter described and to deliver to Large 29,582 duly authorized full paid and non-assessable shares of the common capital stock of National and $174,000 principal amount of such debentures.

12. The shares of stock of National to be delivered to Overholt and Large pursuant to the provisions of this agreement shall at the time of such delivery be approved by the New York Stock Exchange for listing on official notice of issuance. * * * Certificates for such stock will be in such names and denominations as Overholt and Large may respectively designate in advance, or failing such designation will be in the names of Overholt and Large respectively. * * *

13. The debentures of National to be delivered shall be payable July 1, 1938, shall bear interest at the rate of 4% per annum from July 1, 1933, payable semiannually, shall be redeemable at any time on thirty days' prior notice by National at the principal amount thereof and accrued interest to date of redemption, and shall be in registered form and in denominations of $1,000 or multiples thereof as Overholt and Large shall specify, and in form approved by counsel for Overholt and Large customary for such securities.

14. Delivery of the consideration in stock and debentures pursuant to the provisions of the foregoing paragraphs 11 and 13 shall be made against delivery by Overholt and Large respectively to National of proper instruments of transfer and conveyance, and on the delivery by parties hereto of all other agreements and documents in accordance with the terms of this agreement. Such delivery of the consideration by National, delivery of instruments of transfer and conveyance by Overholt and Large, and delivery of other contracts and documents by the parties hereto pursuant to this agreement shall be on June 30, 1933, at the office of Breed, Abbott & Morgan, 15 Broad Street, New York, State of New York, at ten o'clock in the forenoon of said day, daylight saving time.

* * *

21. Schulte agrees upon request of National to cause Overholt and/or Large to make any conveyance or transfer of assets to be made pursuant to this agreement to any corporation which is a wholly owned subsidiary of National at the time of such conveyance and transfer of assets, and it is expressly agreed that any such wholly owned subsidiary or subsidiaries, upon request and nomination of National may assume the obligations (without, however, releasing National therefrom) and thereupon may become entitled to all and singular the rights and benefits of National hereunder.

On June 9, 1933, National wrote the Commissioner of Industrial Alcohol, Washington, D.C., advising among other things that "An executory contract of sale has this day been made between the undersigned [National] as purchaser and D. A. Schulte, Inc., * * * which has undertaken to cause A. Overholt & Company * * * and Large Distilling Company * * * to sell to the undersigned" certain enumerated properties. In addition, it was stated:

It is proposed, subject to federal estate governmental approval, and upon full compliance with all laws, rules, regulations or requirements pertaining thereto, to bring about the transfer of the above mentioned assets and continuation of the businesses heretofore conducted by Overholt and Large through the following procedure.

National has made application to the Commonwealth of Pennsylvania for the creation of two corporations under the names of "A.O. Corporation" and "L.D. Corporation" respectively, the necessary publication therefor has been requested, and it is anticipated that such corporations may be fully incorporated on about the 15th or 16th of June.

The present capital stock as to each such corporation will be five thousand shares of $1.00 par value each. At the time of closing, the entire assets of Overholt will be transferred to A.O. Corporation, and the entire assets of Large will be transferred to L.D. Corporation. This may or may not be coincident with or followed by an increase or change in the capital structure of these two subsidiary corporations. In either event, all of the capital stock of both of such corporations will be owned by National, which now owns all of the common stock and all but less than two hundred shares of the preferred stock of The American Medicinal Spirits Company. Neither of such corporations will at the time of receiving such assets have any debts other than those incident to the formation thereof. Coincident with such transfer of assets, or as soon as practicable thereafter, the name "A.O. Corporation" will be changed to "A. Overholt & Company" or some similar name, and the name "L.D. Corporation" will be changed to "Large Distilling Company" or some similar name.

National proposes, in so far as is permissible and proper so to do, and at the earliest possible moment, to cause such subsidiaries to file all applications for permits, submit for approval all bonds, and take all other steps necessary or convenient as will permit such subsidiaries to continue, so far as possible without interruption, the entire businesses of warehousing and distilling, buying and selling distilled spirits heretofore conducted by Overholt and Large, and subject to the approval and permission of the authorities of the Commonwealth of Pennsylvania, to take like steps looking forward to a full compliance of the law of that commonwealth at the earliest possible moment with respect to the continuation and conduct of such businesses.

National gives assurance that the transaction described above is a bona fide sale of going businesses and respectfully asks that action be expedited upon all applications for the issuance of permits in connection with such sale wherein both of the parties to the executory contract described above desire that the permitted businesses be uninterrupted.

On June 12, 1933, the Commissioner of Industrial Alcohol advised National that the Bureau of Industrial Alcohol was agreeable to the proposed acquisition of the two plants in the manner outlined in National's letter of June 9, 1933, and would instruct the issuance of the necessary permits to the new corporations effective July 1, 1933, upon the filing of the required applications, bonds, and other papers, so that the businesses might be conducted without interruption, and that, if necessary, temporary permits would be issued on proper papers, pending issuance of annual permits.

The L.D. Corporation and A.O. Corporation were incorporated under the laws of Pennsylvania sometime prior to June 20, 1933, on which date the first meetings of directors were held. Each had an authorized capital stock of 5,000 shares of a par value of $1 each. National had advanced to each of the corporations $500 in cash for organization expenses and received therefor, on or about June 20, 1933, 500 shares of the capital stock of each. The directors of the L.D. Corporation at their first meeting authorized the acceptance of an offer from National to cause to be transferred to the L.D. Corporation, for the remaining 4,500 shares of L.D. Corporation stock, the assets of Large for which stock and debentures of National were to be issued under the Schulte-National agreement. Similarly, at their first meeting the directors of the A.O. Corporation authorized the acceptance of an offer from National to cause to be transferred to the A.O. Corporation, for the remaining 4,500 shares of A.O. Corporation stock, the assets of Overholt for which stock and debentures of National were to be issued under the Schulte-National agreement. Upon the transfer by Large and Overholt of their assets covered by the Schulte-National agreement to the L.D. Corporation and A.O. Corporation, respectively, as hereinafter described, those corporation issued their said shares of stock in the amount of 4,500 shares each to National. The assets so received by the L.D. Corporation and A.O. Corporation were, from and after June 30, 1933, continuously held by them until the latter part of 1934, when the L.D. Corporation was merged with the A.O. Corporation, which had changed its name to "A. Overholt & Company."

On June 9 and June 23, 1933, the outstanding capital stock of Distributing consisted of 250,000 shares of no par value, which were owned as follows:

	Shares
D. A. Schulte, Inc	175,000
Park & Tilford	50,000
1931 Corporation	13,750
Thomas L. Chadbourne	1,093
Louis S. Levy	1,718
William Wallace, Jr	844
William M. Parke	844
Louis G. Bissell	188
Frederick Hoff	281
Henry J. Wolff	188
M. J. Witman	1,875
Irma B. Levy	1,563
Carrie E. Schulte	1,562
Estelle E. Frank	94
Nancy Handren	1,000
	250,000

The outstanding capital stock of Large consisted of 1,250 shares of a par value of $1 each, which were owned as follows:

	Shares
A. Overholt & Co	638
Park & Tilford	350
1931 Corporation	137
M. J. Witman	50
Arthur S. Meyer	50
J. Donovan Pheifer	25
	1,250

The outstanding capital stock of Overholt consisted of 7,500 shares of a par value of $100 each, all of which were owned by Distributing.

Between June 23 and June 30, 1933, there was no change in the stockholders of Distributing or of Overholt. With the exception of the transfer by Overholt to Geneva on June 24, 1933, of the 638 shares of stock in Large, there was no change in the stockholders of Large during the same period.

Geneva was organized with an authorized capital stock of 30,000 shares of a par value of $1 each. Pursuant to authorization at meetings of the boards of directors of Large and of Geneva held respectively on June 22 and June 23, 1933, Large on June 23, 1933, transferred to Geneva, subject to the Schenley contract and to the other liabilities of Large, all the assets of Large other than those which Schulte in the Schulte-National agreement had agreed to cause to be transferred to National or its nominee. In exchange for the assets so transferred to Geneva, Large received 10,212 64/153 shares of stock in Geneva. On the same day Large distributed the Geneva stock pro rata as follows to its stockholders without the immediate surrender of any shares of their stock in Large:

	Shares
A. Overholt & Co	5,212 64/153
Park & Tilford	2,859 73/153
1931 Corporation	1,119 43/153
M. J. Witman	408 76/153
J. Donovan Pheifer	204 38/153
Arthur S. Meyer	408 76/153
Total	10,212 64/153

Pursuant to authorizations at meetings of the boards of directors of Overholt and Geneva held on June 24, 1933, Overholt on that day transferred, subject to its liabilities, to Geneva all the assets of Overholt other than those which Schulte in the Schulte-National agreement had agreed to cause to be transferred to National or its nominee, and received in exchange therefor 19,787 89/153 shares of Geneva stock. The fair market value on June 24, 1933, of Geneva stock after this transfer was $54 a share. On the same day, June 24, 1933, Overholt distributed to its sole stockholder, Distributing, without the immediate surrender of any shares of its stock in Overholt, the foregoing 19,787 89/153 Geneva shares, together with the 5,212 64/153 shares of Geneva received the day before in partial liquidation of Large. The stock of Geneva issued to Large and to Overholt totaled 30,000 shares, of which Distributing received 25,000 as the sole stockholder of Overholt and the minority stockholders of Large received 5,000. On June 28, 1933, Distributing distributed pro rata, in partial liquidation, as follows to its stockholders the 25,000 shares of Geneva stock it had received from Overholt:

	Shares
D. A. Schulte, Inc	17,500
Park & Tilford	5,000
1931 Corporation	1,375
Thomas L. Chadbourne	109.3
Louis S. Levy	171.8
William Wallace, Jr	84.4
William M. Parke	84.4
Louis G. Bissell	18.8
Frederick Hoff	28.1
Henry J. Wolff	18.8
M. J. Witman	187.5
Irma B. Levy	156.3
Carrie E. Schulte	156.2
Estelle E. Frank	9.4
Nancy Handren	100
Total	25,000

On June 26, 1933, National by letter to Schulte referring to the Schulte-National agreement and particularly paragraph 21 thereof, requested that, in closing the transaction by transfer of the assets therein enumerated, Schulte cause the Overholt assets to be transferred and conveyed to the A.O. Corporation, and the Large assets to the L.D. Corporation. The letter recited that it was to be understood, as provided in said agreement, that upon the transfer of such assets the A.O. Corporation and L.D. Corporation should be considered as having assumed the obligations under the Schulte-National agreement (without, however, releasing National therefrom) and thereupon should become entitled to all and singular rights and benefits of National under the Schulte-National agreement.

At a meeting held on June 28, 1933, the directors of Large authorized the transfer by Large of its assets (including assets formerly owned by the West Overton Distilling Co. and theretofore acquired by Large from Overholt) covered by the Schulte-National agreement to National or a wholly owned subsidiary in exchange for 29,582 shares of common stock and $174,000 principal amount of debentures of National. They also authorized the distribution pro rata by Large of such stock and debentures, upon their receipt, to the stockholders of Large as the first step in the dissolution of Large. The foregoing action of the directors was approved by the stockholders of Large at a meeting also held on June 28, 1933.

At a meeting held on June 28, 1933, the directors of Overholt authorized the transfer by Overholt of its assets covered by the Schulte-National agreement to National or a wholly owned subsidiary in exchange for 72,418 shares of common stock and $426,000 principal amount of debentures of National. They also authorized the distribution pro rata by Overholt of such stock and debentures to the stockholders of Overholt as the first step in the dissolution of Overholt. The action of the directors was approved by the stockholders (Distributing being the sole stockholder) of Overholt at a meeting also held on June 28, 1933.

Pursuant to the request from National and pursuant to the action of their respective directors and stockholders, Large and Overholt on June 30, 1933, transferred, assigned, and conveyed all their then remaining assets direct to the L.D. Corporation and A.O. Corporation, respectively. On the same day National issued and delivered to Large 29,582 shares of common stock and $174,000 principal amount of 4 percent debentures for the assets transferred that day by Large to the L.D. Corporation and issued and delivered to Overholt 72,418 shares of common stock and $426,000 principal amount of 4 percent debentures for the assets transferred that day by Overholt to the A.O. Corporation. The debentures were due July 1, 1938, but at the option of National and upon 30 days' notice were redeemable in whole or in part at par and accrued interest to the redemption date.

On June 30, 1933, confirmations were made in writing by Large and the L.D. Corporation and Overholt and the A.O. Corporation, respectively, of understandings that transfers of the assets from Large to the L.D. Corporation and from Overholt to the A.O. Corporation were to be made as of midnight, June 30, 1933. These agreements as to the time of the effectiveness of the transfers were made necessary by Internal Revenue regulations respecting permits.

On June 30, 1933, following its receipt of the 29,582 shares of common stock and the $174,000 principal amount of debentures of National, Large distributed pro rata such stock and debentures, constituting all of its then assets, to its stockholders as follows:

	Shares	Debentures
Geneva Corporation	15,099	$89,000.00
Park & Tilford	8,282.761	48,611.11
1931 Corporation	3,242.109	19,027.77
M. J. Witman	1,183.252	6,944.45
Arthur S. Meyer	1,183.252	6,944.45
J. Donovan Pheifer	591.626	3,472.22
Total	29,582.00	174,000.00

On June 30, 1933, pursuant to authorization at a meeting of its directors held on June 28, 1933, Geneva, upon receipt from Large of the 15,099 shares of common stock and and $89,000 principal amount of debentures of National, distributed pro rata such stock and debentures in partial liquidation to its stockholders as follows:

	Shares	Debentures
D. A. Schulte, Inc	8,807.750	$51,916.67
Park & Tilford	3,955.675	23,316.45
1931 Corporation	1,255.372	7,399.70
Thomas L. Chadbourne	55.011	324.26
Louis S. Levy	86.467	509.67
William Wallace, Jr	42.479	250.39
William M. Parke	42.479	250.39
Louis G. Bissell	4.462	55.77
Frederick Hoff	14.143	83.36
Henry J. Wolff	9.462	55.77
M. J. Witman	299.965	$1,768.12
Irma B. Levy	78.665	463.69
Carrie E. Schulte	78.615	463.39
Estelle E. Frank	4.731	27.89
Nancy Handren	50,330	296.67
Arthur S. Meyer	205.596	1,211.87
J. Donovan Pheifer	102.798	605.94
Total	15,099.000	89,000.00

On June 30, 1933, following its receipt of the 72,418 shares of common stock and the $426,000 principal amount of debentures of National, Overholt distributed such stock and debentures, constituting all of its then assets, to its sole stockholder, Distributing.

On June 30, 1933, pursuant to authorization at meeting of its directors and stockholders, Distributing upon receipt from Overholt of the 72,418 shares of common stock and the $426,000 principal amount of debentures of National distributed pro rata such stock and debentures, comprising all of its then assets, to its stockholders as follows:

	Shares	Debentures
D. A. Schulte, Inc	50,692.600	$298,200.00
Park & Tilford	14,483.600	85,200.00
1931 Corporation	3,982.990	23,430.00
Thomas L. Chadbourne	316.611	1,862.47
Louis S. Levy	497.657	2,927.47
William Wallace, Jr	244.483	1,438.18
William M. Parke	244.483	1,438.18
Louis G. Bissell	54.458	320.35
Frederick Hoff	81.398	478.82
Henry J. Wolff	54.458	$320.35
M. J. Witman	543.135	3,195.00
Irma B. Levy	452.758	2,663.35
Carrie E. Schulte	452.468	2,661.65
Estelle E. Frank	27.229	160.18
Nancy Handren	289.672	1,704.00
Total	72,418.000	$426,000.00

After the above distributions on June 30, 1933, of the National shares and debentures, Large, Overholt, and Distributing were left without any assets or property whatsoever. The names of Large and Overholt were subsequently changed to "The Lorraine Corporation" and "The Oldham Corporation, " respectively. They were dissolved on May 31 and June 4, 1934, respectively. Previously, on June 30, 1933, the name of Distributing was changed to "The Darden Corporation." It was dissolved on June 12, 1934. By the latter part of 1934 Geneva, which is still in existence, had liquidated the assets received by it and thereafter held nothing but cash or the equivalent. On December 19, 1934, it distributed to its stockholders pro rata in partial liquidation $300,000 ( $10 a share on 30,000 shares) and in January 1935 made a further distribution in partial liquidation of $10,000. Geneva then had left approximately $35,000 in cash, which it still holds, and $20,000 which was on deposit under an escrow agreement to cover certain contingent liabilities.

The following is a statement of the assets and liabilities transferred by Large to Geneva on June 23, 1933, in the amounts at which they appeared on the books of Large, the amounts at which they were entered on the books of Geneva, and the amounts received or paid by Geneva upon liquidation thereof:

		Amount appearing on the books of Large	Amount entered on the books of Geneva	Amount received or paid by Geneva upon liquidation
ASSETS:
Cash		$10,055.05	$10,055.05	$10,055.05
Inventories:
Whiskey	$1,865,386.97
Less Schenley credit	100,110.81
		1,765,276.16	1,765,276.16	2,346,776.59
Gin		5,000.00	5,000.00	59,070.74
Barrels		0.00	0.00	13,685.88
Prepaid items	12,670.11	12,670.11	0.00
Total		1,793,001.32	1,793,001.32	2,429,588.26
LIABILITIES:
Accounts payable		$4,867.47	$4,867.47	$4,867.47
Accrued interest		59,533.33	59,533.33	107,550.54
Notes payable		2,085,000.00	2,085,000.00	2,085,000.00
Total		2,149,400.80	2,149,400.80	2,197,418.01

The following is a statement of the assets and liabilities transferred by Overholt to Geneva on June 24, 1933, in the amounts at which they appeared on the books of Overholt, the amounts at which they were entered on the books of Geneva, and the amounts received or paid by Geneva upon liquidation thereof:

	Amount appearing on the books of Overholt	Amount entered on the books of Geneva	Amount received or paid by Geneva upon liquidation
ASSETS:
Cash		$6,768.67	$6,768.67	$6,768.67
Accounts receivable	$192,702.82
Less reserve	13,329.61
		179,373.21	179,373.21	179,373.21
Whiskey 1		48,355.62	48,355.62	87,831.00
Prepaid items		22,329.10	22,329.10	18,159.74
Large stock (638 shares)		638.00	638.00	2
Total		257,464.60	257,464.60	292,132.62
LIABILITIES:
Accounts payable		$3,192.66	$3,192.66	$3,192.66

In liquidating the assets taken over from Large and Overholt Geneva expended $156,032.74, of which the secretary of Geneva in 1933 estimated $146,032.74 was applicable to the assets taken over from Large and $10,000 was applicable to the assets taken over from Overholt. On the basis of the foregoing, Geneva realized on the liquidation of the assets taken over from Large the net amount of $86,137.51 and on liquidation of the assets taken over from Overholt realized a net amount of $278,939.96 in cash and the 15,099 shares of National common stock and $89,000 par value of its debentures as set out in the note to the tabulation above. After the distribution by Geneva on June 30, 1933, 0f the stock and debentures of National, the Geneva stock had a fair market value of $12 a share.

The following is a statement of the assets transferred by Large to the L.D. Corporation on June 30, 1933, in the amounts shown by the books of Large, and the amounts at which they were entered on the books of the L.D. Corporation:

Assets		Amount appearing on books of Large	Amount entered on books of L.D. Corporation
Bottling supplies		$923.86
Land		5,000.00
Buildings	$30,000.00
Machinery	5,000.00
Residence	6,875.23		$348,920
	41,875.23
Less reserve for depreciation	10,056.14
		31,819.09
Trade brands, good will, etc			600,000
Total		37,742.95	948,920

On June 30, 1933, and prior to the transfer of the foregoing assets by Large the assets of the L.D. Corporation were limited to $500 in cash, which sum had been paid to it by National for 500 shares of its stock. It had no liabilities aside from its capital stock.

The following is a statement of the assets transferred by Overholt to the A.O. Corporation on June 30, 1933, in the amounts shown by Overholt's books, and the amounts at which they were entered on the books of the A.O. Corporation:

Assets		Amount appearing on the books of Overholt	Amount entered on the books of A.O. Corporation
Cases and supplies		$187.50
Inventories	$467,384.28		$2,385,635
Less: Evaporation reserve	39,844.97
		427,539.31
Real estate	134,116.24
Machinery and fixtures	28,836.95
New fermenter	6,991.87
Residence furniture	15,540.00		985,445
	185,485.06
Less reserve for depreciation	44,037.38
		141,447.68
Brands
Good will		325,000.00	2,400,000
Total		894,174.49	5,771,080

On June 30, 1933, and prior to the transfer of the foregoing assets by Overholt, the assets of the A.O. Corporation were limited to $500 in cash, which sum had been paid to it by National for 500 shares of its stock. It had no liabilities aside from its capital stock.

Large had never distilled any whiskey. From the time of its incorporation in 1930 it had been engaged in liquidating, under the Schenley contract, a stock of whiskey held in bond which it had acquired about the time of its organization. This whiskey was the chief asset of Large and its sale under the Schenley agreement had been Large's only source of income from the time of its incorporation. By the close of business on June 22, 1933, and prior to the transfer of a portion of its assets to Geneva, Large had sustained losses from operations totaling $319,906.53. Under the agreement with Overholt entered into on January 2, 1931, Large had assigned and transferred to Overholt its rights to make whiskey under any permits which it might obtain. Under that agreement Large was entitled at June 23, 1933, to one-half of any profit which Overholt might derive from the disposition of whiskey distilled by Overholt after 1930, which included the Overholt inventory of whiskey subsequently transferred to the A.O. Corporation on June 30, 1933, and the whiskey subsequently transferred to Geneva on June 24, 1933. No value was placed on the books of Large with respect to any profit that Overholt might derive in transferring such whiskey to the A.O. Corporation and Geneva respectively. Nor was there ever an accounting between Overholt and Large with respect to such whiskey, apparently for the reason that their interests in the whiskey transferred to Geneva were merged in Geneva, and in that transferred to the A.O. Corporation were respectively represented by the stock and debentures of National that were issued to Overholt and Large.

Upon the transfer by Large and Overholt to the L.D. Corporation and A.O. Corporation, respectively, of the assets contemplated by the Schulte-National agreement, National issued to Large and Overholt a total of 102,000 shares of its common stock and $600,000 principal amount of debentures, and the L.D. Corporation and A.O. Corporation each issued to National 4,500 shares of their stock. With respect to the various transfers outlined, National made the following entries on its books under date of June 30, 1933:

	Dr.	Cr.
A.O. Corporation
L.D. Corporation Investment a/c	$6,720,000.00
To Capital Stock - Common		$6,120,000.00
To Debentures		600,000.00
To record issue of 102,000 shares of common stock at valuation of $60 per share and $600,000 in Debentures bearing interest at 4% due July 1, 1938, interest payable on July 1st and January in full payment for Distilleries, Warehouses and all other Real Estate, Buildings, Machinery and Equipment now owned by A. Overholt & Company a Pennsylvania corporation, and Large Distilling Company, a Maryland corporation together with the names, goodwill, brands, trade names and trademarks of said two corporations and also of West Overton Distilling Company a Pennsylvania corporation, and also 31,000 barrels of rye whiskey distilled after January 1, 1930 and owned by said A. Overholt & Company and also certain supplies, trade records and correspondence belonging to Overholt and Large. These assets were taken over in the name of the A.O. Corporation and L.D. Corporation and National Distillers Products Corporation received 4,500 shares of capital stock of each company in full payment.

The joint resolution proposing the Twenty-First Amendment to the Constitution in repeal of the Eighteenth Amendment was passed in the Senate on February 16, 1933, and in the House of Representatives on February 20, 1933. On February 21, 1933, the Secretary of State forwarded copies of the resolution to the governors of the respective states for ratification. Prior to May 20, 1933, 38 states had provided for action upon the proposed amendment and 3 states had ratified it. By June 30, 1933, 40 states had provided for action on the proposed amendment and 9 states had ratified it. By December 5, 1933, three-fourths of the states had completed ratification and the Acting Secretary of State on that date certified that the proposed amendment had become valid as a part of the Constitution.

Although general business conditions were bad in 1933, the stocks of distillery companies which were listed on a stock exchange experienced a gradual rise in price in June 1933, due to the fact that repeal of prohibition was being talked and was actually under way. During the period from January 1, 1933, through May 31, 1933, the common stock of National ranged from a low of 16 7/8 per share on February 15, 1933, to a high of 71 3/8 on May 27, 1933. During the four weeks from June 3 to 30, 1933, 1,018,500 shares of National common stock were sold on the New York Stock Exchange. The price ranged during the month of June 1933 from a low of 63 on June 1 to a high of 108 1/4 on June 28. The prices on the following days in June were as indicated below:

June	High	Low
3	69 1/4	64 3/4
9	71 3/8	67
10	72 1/4	70 1/8
17	72 1/2	71 1/2
23	77 5/8	73 1/2
24	78 1/4	76 1/4
30	99 3/8	93 3/4

The market price on July 1, 1933, was high 99 1/2, low 95 3/4. The market continued to rise thereafter until July 17, 1933, when it reached a peak of high 124 7/8, low 117 3/4. The volume of sales for the four weeks July 1 through July 28, 1933, was as follows:

Week ended -	Shares sold
July 7	203,300
July 14	293,900
July 21	404,900
July 28	131,000

The overtures made in the spring of 1933 by National for the acquisition of assets of Large and Overholt were made through brokers, among whom was Lehman Brothers. Sometime prior to May 27, 1933, Schulte, feeling that 102,000 shares of common stock in National was a larger interest in that corporation that in desired to retain, entered into a verbal agreement, reduced to writing on June 9, 1933, with Lehman Brothers for the purchase of 25,000 shares of common stock in National at $56 a share and gave Lehman Brothers an option to purchase an additional 25,000 shares at $61. On June 30, 1933, the stockholders of Distributing and the stockholders of Large (except Geneva) and who constituted all of the stockholders of Geneva, appointed Arthur D. Schulte, Jerome Eisner, and Alexander B. Royce, hereinafter referred to as attorneys in fact, their agents and attorneys in fact to receive the shares of common stock and debentures of National to which such stockholders might be entitled under the distributions thereof by Large, Geneva, and Distributing, to make certain dispositions of portions thereof including the delivery of 25,000 shares to Lehman Brothers for $1,400,000, or $56 a share, and the holding of another 25,000 shares under option to Lehman Brothers at $61 a share, and to distribute the remaining balances of money, stock and debentures to the stockholders according to their respective interests as set out in the power of attorney. From the 102,000 shares of common stock and the $600,000 principal amount of debentures of National, the attorneys in fact on July 1, 1933, pursuant to agreements entered into by said stockholders and others on or about June 9, 1933, delivered to the brokers and others 9,500 shares of the stock and $200,000 principal amount of debentures in payment of commissions on and other expenses incident to the transaction wherein National issued its stock and debentures to Large and Overholt upon the transfer of their assets to the L.D. Corporation and A.O. Corporation, respectively, and executed other authorizations contained in the power of attorney.

On June 30, 1933, Robert Lehman, of Lehman Brothers, inquired of D. A. Schulte and M. J. Witman, representatives of Schults, if they wanted to sell any more stock and offered $97 1/2 a share for 10,000 shares, with ten-day options for 10,000 shares more at $100 a share and another 10,000 shares at $105 a share. Schulte and Witman decided that the stock should be sold, but, to save complications and avoid the necessity of obtaining the consent of every stockholder of the group, that the sale should be made for D. A. Schulte, Inc., Park & Tilford, and the 1931 Corporation, the holders of the largest amounts of the stock. Thereupon a memorandum dated June 30, 1933, was prepared and was initialed by Schulte which, although in form an offer and option, was considered by the parties as a binding transaction for the purchase of the stock. On July 5, 1933, Schulte addressed a letter to Lehman Brothers in substance confirming the memorandum of June 30, 1933, except that the option as to the final 10,000 shares was, for some undisclosed reason, reduced to 9,500 shares.

On July 5 and 6, 1933, Park & Tilford, the 1931 Corporation, and D. A. Schulte, Inc., made the following transfers of stock in National:

	Shares transferred	Total
Park & Tilford:
July 5, to W. C. Meehan (with Lehman Brothers)	8,226
July 6 to Ira Haupt & Co	2,382	10,608
1931 Corporation:
July 5, to W. C. Meehan (with Lehman Brothers)	2,624
July 6, to Ira Haupt & Co	742	3,366
D. A. Schulte, Inc.:
July 5, to W. C. Meehan (with Lehman Brothers)	18,323
July 6, to Ira Haupt & Co	5,300	23,623
Total		37,597

In the accounting reports dated October 5, 1933, and prepared by J. Donovan Pheifer, who was auditor for the attorneys in fact and during 1933 was secretary of Large, Overholt, Distributing, and Geneva and had supervision of the bookkeeping for Schulte, the above transfers on July 5 and 6, 1933, were accounted for as follows:

Park & Tilford - net proceeds from the sale of 10,608 shares	$1,007,143.27
1931 Corporation - proceeds of sale of 3,366 shares	319,571.87
D. A. Schulte, Inc. - net proceeds from the sale of 23,623 shares	2,242,789.21

On July 7, 1933, National sent notices to holders thereof that the 4 percent debentures due July 1, 1938, would be redeemed on August 7, 1933. On July 12, 1933, the directors of National authorized the payment on redemption of the principal amount thereof, $600,000, plus accrued interest from July 1 to August 7, 1933, amounting to $2,400. The fair market value of the said debentures on June 30, 1933, was their par or face value.

The various reports to the stockholders of Large (except Geneva) and of Distributing dated October 5, 1933, and made by Pheifer were in the nature of an accounting and show the following with respect to the participation of each stockholder in the 102,000 shares of common stock and $600,000 principal amount of debentures of National, the pro rata contribution of each stockholder to commissions and expenses, the number of shares of each stockholder sold to Lehman Brothers by attorneys pursuant to written agreement of June 9, 1933, and the number of Geneva shares each stockholder received:

[Table omitted]

The reports show that the attorneys paid taxes in the amount of $22,221.94, which were deducted by them in accounting to the stockholders for the proceeds received from the disposition of National shares and debentures disposed of by the attorneys. However, the evidence is not clear as to the nature of the taxes or as to whether such taxes were those of the corporations or were those of the stockholders.

The fair market values at the time of receipt by the petitioners, on June 30, 1933, of the shares of stock in National received by them and transferred to Lehman Brothers under the option agreement (25,000 shares at $56 a share and 25,000 shares at $61 a share) were the amounts stated in said agreement. The fair market value of all other National shares received by the petitioners on June 30, 1933, was $97.75 a share.

Income and excess profits tax returns for 1933 were filed with the collector of internal revenue for the second district of New York on behalf of Large and Overholt on March 7, 1934, on behalf of Distributing on March 8, 1934, and on behalf of Geneva on March 10, 1934. The returns for Large and Overholt showed net losses and disclosed complete liquidation of the assets of the respective corporations. The return for Distributing showed no income received during the year and disclosed the corporation's complete liquidation of assets. No income was reported in the returns for Large, Overholt, and Geneva from the exchanges at issue in these proceedings.

On September 27, 1933, capital stock tax returns for the year ended June 30, 1933, were filed with the collector of internal revenue for the second district of New York on behalf of Large, Overholt, Distributing, and Geneva, in which the declared value of their respective capital stocks was shown at $1,000 for each, except that the declared value of the capital stock of Geneva was shown at $3,500,000.

Beginning in April 1934 and continuing for about two months, four revenue agents made an examination and audit of the returns and records of Large, Overholt, distributing, and Geneva. All of the books and records of those corporations, including data relative to the transactions with National, were made available to the revenue agents. During the examination Pheifer, who was secretary of the four corporations in 1933, informed one of the revenue agents that on June 30, 1933, the conveyances of assets by Large and Overholt were actually made to the nominees of National and that fact was a topic of discussion between him and all of the revenue agents.

Without furnishing them with copies of the reports of the revenue agents, the respondent on October 15, 1935, issued a 30-day audit letter to Large, stating that there was a deficiency of $288,175.40 in its income tax and $104,784.80 in its excess profits tax for 1933, on the ground that Large had derived a gain of $2,131,414.65 on a sale of its assets to National, and issued 30-day audit letters to Geneva and the minority stockholders of Large, proposing the assertion of liability against them as transferees of Large in respect of such taxes; also on October 15, 1935, the respondent issued a 30-day audit letter to Overholt, stating that there was a deficiency of $596,030.63 in its income tax and $216,732.16 in its excess profits tax for 1933, on the ground that Overholt had derived a gain of $4,368,321.29 on a sale of its assets to National, and issued a 30-day audit letter to Distributing, proposing the assertion of liability against it as transferee of Overholt for such taxes, and also 30-day audit letters to all the stockholders of Distributing, proposing the assertion of liability against them as transferees of Distributing, transferee of Overholt, for such taxes.

On or about December 12, 1935, protests were filed with the respondent on behalf of Large, Overholt, the stockholders of Large, including Geneva, Distributing, and the stockholders of Distributing. The protest for Large contained the following statement:

In pursuance of a plan of reorganization National Distillers Products Corporation acquired all of the properties of the taxpayer in exchange for the issue to the taxpayer of 29,582 shares of stock and $174,000 principal amount of debenture bonds of National Distillers Products Corporation, which stock and bonds the taxpayer thereupon distributed to its stockholders. Thereafter the taxpayer was dissolved.

The protest for Overholt contained an identical statement except that the amount of stock and debentures was different and the distribution of stock and debentures was shown as to a sole stockholder, Distributing. In the protests it was contended that the transfers by Large and Overholt for which the stock and debentures were received were reorganizations within the meaning of the provisions of section 112 of the Revenue Act of 1932. On January 14, 1936, a conference was held in Washington by representatives of the taxpayers and conferees of the Bureau, and on February 1, 1936, a supplemental protest or brief was filed with respondent on behalf of the taxpayers.

On March 6, 1936, the respondent issued to Large, to Overholt, to the stockholders of Large, including Geneva, to Distributing, and to the stockholders of Distributing similar letters referring to the conference held on January 14, 1936, and to the supplemental protest dated February 1, 1936, relative to tax liability for 1933, which letters contained the following:

After careful consideration of your protest and the oral arguments advanced by your representatives, your contentions have been conceded. The deficiency in tax proposed in Bureau letter dated October 15, 1935, therefore will not be assessed.

On January 8, 1936, Geneva executed a consent to the extension of the period of limitation for the assessment of its taxes for 1933 to June 30, 1937. On April 3, 1936, the respondent issued a 20-day audit letter to Geneva, stating that there was a deficiency of $214,830.25 in its income tax and $64,147.03 in its excess profits tax for 1933, primarily on the ground that Geneva had received a liquidating dividend from Large of 15,099 shares of stock and $89,000 principal amount of debentures of National of a total value of $1,563,039.88, which amount, less $638 determined as the cost of 638 shares of stock in Large, or $1,562,401.88, was taxable as a liquidating dividend. On or about April 8, 1936, a protest was filed on behalf of Geneva which contained the statement that "On June 30, 1933, Large Distilling Company, pursuant to a plan of reorganization, transferred substantially all of its assets to National Distillers Products Corporation in exchange for stock and bonds of National Distillers, and thereupon distributed such stock and bonds to its stockholders, including the taxpayer, * * *" and in which it was contended that such distribution by Large was in connection with a reorganization and was free from tax under the provisions of section 112 of the Revenue Act of 1932. On April 15, 1936, a conference was held in Washington between conferees of the Bureau of Internal Revenue and representatives of the taxpayer. On February 12, 1937, the respondent issued a letter to Geneva making reference to the conference held on April 15, 1936, and containing the following statement:

After careful consideration of your protest and the oral arguments advanced by your representative, your contentions have been conceded. The deficiency in tax proposed in Bureau letter dated April 3, 1936, therefore, will not be assessed.

On February 25, 1937, the respondent issued a notice to each of the petitioners herein who were stockholders of Distributing, asserting liability as transferee of assets of Distributing in respect of income tax of $1,174,830.26 and excess profits tax of $427,204.75 for 1933 determined to be due from Distributing. On March 5, 1938, the respondent issued a notice to each of the petitioners herein who were stockholders of Geneva, asserting liability as transferee of assets of Geneva, transferee of assets of Large, and, as transferee of assets of Distributing, transferee of assets of Overholt, transferee of assets of Large, in respect of income tax of $288,175.40 and excess profits tax of $104,784.80 for 1933 determined to be due from Large. On March 5, 1938, the respondent issued a notice to each of the petitioners herein who were stockholders of Distributing, asserting liability as transferee of assets of Distributing, transferee of assets of Overholt, in respect of income tax of $596,030.63 and excess profits tax of $216,732.16 for 1933 determined to be due from Overholt. On March 5, 1938, the respondent issued a notice to each of the petitioners herein who were stockholders of Geneva, asserting liability as transferee of assets of Geneva in respect of income tax of $214,830.25 and excess profits tax of $64,147.03 for 1933 determined to be due from Geneva. The taxes determined to be due from Large, from Overholt, and from Geneva were the same as those which the Bureau had previously stated in its letters of March 6, 1936, and February 12, 1937, would not be assessed.

On deficiency notice asserting taxes for 1933 has ever been issued to Large, Overholt, Geneva, or Distributing, and no assessment of taxes for 1933 asserted in respect of the exchanges and transactions at issue in these proceedings has ever been made against Large, Overholt, Geneva, or Distributing. Except as hereinabove stated, no assertion of a deficiency in income and excess profits taxes for 1933 of Large, Overholt, Geneva, or Distributing, or of transferee liability, direct or indirect, for such taxes has ever been made against Large, Overholt, Geneva, or Distributing, or against any of the petitioners herein. No part of any of the deficiencies in tax of Large, Overholt, Distributing, or Geneva determined by respondent to be due from said corporations respectively and in respect of which he has asserted liability as transferee against petitioners herein has ever been paid by said corporations or by any of the petitioners herein.

During the hearing of these proceedings the parties submitted in evidence the following:

It is stipulated and agreed that the taxable net income for 1933 of the stockholders of Large, of the Distributing Company, and of Geneva, was determined by the Commissioner, after consideration of the returns of said stockholders, which disclosed and reported the receipt in liquidation of certain National Distillers shares and debentures, and the receipt of certain Geneva shares from the Overholt Distributing Company, and from Large Distilling Company, as now shown by the evidence herein.

This determination of the Commissioner was after the consideration of the representations and protests for and in behalf of said stockholders, and was accepted by said stockholders without appeal to the Board of Tax Appeals.

In arriving at said determinations by the Commissioner, the respective stockholders did not claim, and the Commissioner did not allow, any credit or deduction on account of the taxes asserted in these proceedings against Large, Overholt, the Distributing Company, or Geneva.

D. A. Schulte, Inc., filed a return for the year 1933, reporting the distribution received by it, but reported no tax due because of offsetting losses, and paid no tax for the year 1933.

A substantial portion, if not all, of the remaining stockholders of the Distributing Company, Large, and Geneva, were determined to have taxable income and paid tax thereon in amounts which cannot now be accurately agreed upon, but which the parties hereto have agreed may be and will be later supplied by supplemental stipulation to be considered on Rule 50 Settlement in case it develops, from the outcome of these proceedings, that such a settlement is necessary.

OPINION.

TURNER: The petitioners in these proceedings are contesting the determination of the respondent that they are liable as transferees or as transferees of transferees of Large, Overholt, Distributing, or Geneva, or all of them. They question the liability of each of these corporations for both the income and excess profits tax with which the respondent seeks to charge them and contend, further, that if such liability ever existed there is now no liability against them, due to the running of the statute of limitations.

With respect to the liability of Large and Overholt, the question is whether the transfer of assets by Large to the L.D. Corporation for National stock and debentures and the transfer of assets by Overholt to the A.O. Corporation for National stock and debentures constituted reorganizations within the meaning of section 112(i)(1)(A) of the Revenue Act of 1932 ¹ and exchanges within the meaning of section 112(b)(4). ² The liability of Geneva and a part of the liability with which Distributing is charged turns on the question whether the subsequent distributions in liquidation by Large and Overholt of the National Shares and debentures to Geneva and Distributing, respectively, were exchanges within the meaning of section 112(b)(3) of the statute. ³ With respect to the liability of Distributing, there is the further question whether the distribution to it by Overholt of 25,000 shares of Geneva stock was "in pursuance of a plan of reorganization" within the meaning of section 112(g) of the statute. ⁴

As early as 1930 National had been interested in acquiring certain properties of Large and Overholt and, during the first several months of 1933, had been carrying on negotiations with respect thereto with Schulte, which, directly or indirectly, owned controlling interests in both Large and Overholt. National desired to acquire Large and Overholt as going concerns but was insistent that when acquired they should be free from existing liabilities. Furthermore, it was unwilling to take over the whiskey inventory of Large, which was subject to the optional contract of sale with Schenley. By May 26, 1933, it had been agreed that the consideration to be paid for the desired assets of Large and Overholt should be 102,000 shares of National common stock and $600,000 par value of its debentures.

Under date of June 9, 1933, the agreement between National and Schulte was reduced to writing. The assets of Large and Overholt which were subject to the agreement were carefully designated. It was also provided that upon request of National the designated properties should be conveyed to any wholly owned subsidiary of National and that such subsidiary, upon nomination of National, might "assume the obligations (without, however, releasing National therefrom) and thereupon * * * become entitled to all and singular the rights and benefits of National" thereunder. National was a holding company and its activities had never been those of an operating company, and, in the light of the provisions just cited from the contract and the transaction as it was actually carried out, we think it is apparent that National never had any intention of acquiring as its own any of the properties of Large and Overholt.

Schulte was desirous that the designated properties should be disposed of in such manner as to avoid liability for income taxes on such gains as might be realized by Large and Overholt. They consulted counsel and were advised that if the transactions were carried out in the manner more fully set forth in our findings of fact the gain would not be recognizable for income tax purposes. Geneva was accordingly organized and, in order that it might literally appear that Large and Overholt were transferring all of their assets to the L.D. Corporation and A.O. Corporation, respectively, Large on June 23, 1933, and Overholt on June 24, 1933, transferred their assets not covered by the National-Schulte agreement to Geneva for its stock, the said stock in each instance being distributed on the day of its receipt to their stockholders. In the meantime National had organized the L.D. Corporation and A.O. Corporation and under date of June 20, 1933, had advised the L.D. Corporation that it had been designated as the nominee of National to receive the desired assets of Large and the A.O. Corporation that it had been designated as the nominee of National to receive the desired assets of Overholt. It was stated in these communications that National would undertake the payment of the full consideration to Large and Overholt for the assets to be acquired and that the L.D. Corporation and A.O. Corporation should each issue and deliver to National 4,500 shares of its capital stock, being the remainder of the authorized but unissued stock of each corporation. On the same date, June 20, the L.D. Corporation and A.O. Corporation adopted appropriate resolutions accepting the proposals of National and on June 26, 1933, National advised the Schulte interests that the designated assets of Large and Overholt were to be transferred directly to the L.D. Corporation and A.O. Corporation, respectively, and that these corporations had become entitled to all of the rights and benefits of National under the agreement of June 9. On June 30, 1933, Large and Overholt transferred and conveyed the assets covered by the Schulte-National agreement to the L.D. Corporation and A.O. Corporation, respectively, receiving therefor from National 102,000 shares of its common stock and $600,000 par value of its debentures.

It is the contention of the petitioners that the transactions whereby Large and Overholt transferred their designated assets to the L.D. Corporation and A.O. Corporation, both subsidiaries of National, and received therefor stock and debentures of National constituted reorganizations within the meaning of section 112(i)(1)(A), supra, and that recognition of the gain realized by Large and Overholt is accordingly barred by the provisions of section 112(b)(4). It is the contention of the respondent, however, that the L.D. Corporation and A.O. Corporation, prior to June 30, 1933, the date of the transfer of the assets of Large and Overholt, acquired all of the rights of National to those assets and, since the assets were transferred directly to and retained by the L.D. Corporation and A.O. Corporation, National may not be said to have been "a party to a reorganization" wherein Large and Overholt disposed of their assets, and the receipt of National's stock and debentures by Large and Overholt was not without recognition of gain, as the petitioners claim. The respondent also contends that there was no reorganization of Large and Overholt within the meaning of section 112(i)(1)(A), in that the assets transferred to the L.D. Corporation and A.O. Corporation did not constitute all or substantially all of the assets of Large and Overholt.

The facts here are substantially similar to those considered by us in Michigan Steel Corporation of New Jersey,38 B.T.A. 435">38 B.T.A. 435, and the petitioners do not contend otherwise. It is their claim however that Groman v. Commissioner,302 U.S. 82">302 U.S. 82, and Helvering v. Bashford,302 U.S. 454">302 U.S. 454, do not justify the conclusion reached in that case and that we should overrule Michigan Steel and reach a contrary conclusion here. They concern themselves particularly with the fact that National was one of the contracting parties and that the consideration of 102,000 shares of National's common stock and $600,000 par value of its debentures paid for the designated assets of Large and Overholt was issued and delivered directly to Large and Overholt by National. These facts, it is claimed, show acquisition by National of all of the assets of Large and Overholt in exchange for National stock and debentures within the meaning of subdivisions (i)(1)(A) and (b)(4) of section 112 of the statute, even though the said assets were transferred directly to and because the property of the L.D. Corporation and A.O. Corporation rather than National. We find nothing new in the contention of the petitioners and the arguments presented are no more convincing than when offered in Michigan Steel. There we expressed the view "that the Supreme Court was clearly disinterested in the question of whether the securities were transferred directly from the contracting parent corporation or indirectly through a wholly owned subsidiary", the important question being whether the securities issued for the assets were the securities of the corporation which became the owner of the assets and the business disposed of. In Helvering v. Bashford, supra, the Supreme Court said: "The participation of Atlas [in this case National] in the reorganization of its competitors [in this case Large and Overholt] into a new company [in this case L.D. Corporation and A.O. Corporation] which became a subsidiary did not make Atlas 'a party to the reorganization.' The continuity of interest required by the rule is lacking." In Groman v. Commissioner, supra, we find the following:

It is argued, however that Ohio [in this case L.D. Corporation and A.O. Corporation] was the alter ego of Glidden [in this case National]; that in truth Glidden was the principal and Ohio its agent; that we should look at the realities of the situation, disregard the corporate entity of Ohio, and treat it as Glidden. But to do so would be to ignore the purpose of the reorganization sections of the statute, which, as we have said, is that where, pursuant to a plan, the interest of the stockholders of a corporation continues to be definitely represented in substantial measure in a new or different one, then to the extent, but only to the extent, of that continuity of interest, the exchange is to be treated as one not giving rise to present gain or loss. If cash or "other property," that is, property other than stock or securities of the reorganized corporations, is received, present gain or loss must be recognized. Was not Glidden's prior preference stock "other property" in the sense that its ownership represented a participation in assets in which Ohio, and its shareholders through it, had no proprietorship? Was it not "other property" in the sense that qua that stock the shareholders of Indiana assumed a relation toward the conveyed assets not measured by a continued substantial interest in those assets in the ownership of Ohio, but an interest in the assets of Glidden a part of which was the common stock of Ohio? These questions we think must be answered in the affirmative. To reject the plain meaning of the term "party," and to attribute that relation to Glidden, would be not only to disregard the letter but also to violate the spirit of the Revenue Act.

We think it clear that the contentions of the petitioners must be rejected and that the stock and debentures of National may not be regarded as the securities of a corporation "a party to a reorganization" within the meaning of section 112(b)(4). Groman v. Commissioner, supra;Helvering v. Bashford, supra; and Michigan Steel Corporation of New Jersey, supra. We are also of the opinion that the respondent is correct in his contention that the L.D. Corporation and A.O. Corporation did not acquire all or substantially all of the assets of Large and Overholt. At no time was it contemplated that National or any subsidiary should acquire the whiskey inventory of Large, which was subject to the Schenley contract, or the other assets transferred by Large and Overholt to Geneva. If therefore the assets transferred to the L.D. Corporation and A.O. Corporation actually had been acquired by and had become the property of National, there still would not have been an acquisition of substantially all the assets of Large and Overholt so as to make the transaction a reorganization within the meaning of section 112(i)(1)(a). Helvering v. Elkhorn Coal Co., 95 Fed.(2d) 732; A. W. Mellon,36 B.T.A. 977">36 B.T.A. 977. Accordingly, the gain realized by Large upon the transfer of assets to the L.D. Corporation and by Overholt upon the transfer of assets to the A. O. Corporation for National stock and debentures was not without recognition. Furthermore, the said National stock and debentures not being the securities of a corporation a party to a reorganization, section 112(b)(3) is not applicable to the distributions of the said National stock and debentures to Geneva and Distributing in liquidation of Large and Overholt, respectively, and the gain realized by Geneva and Distributing by reason of such distributions must be recognized.

With respect to Distributing, there remains the question whether the gain realized upon the distribution to it by Overholt of 25,000 shares of Geneva stock under date of June 28, is to be recognized. Of the said 25,000 Geneva shares Overholt had received 5,212 64/153 shares on June 23 in partial liquidation of Large and 19,787 89/153 shares direct from Geneva on June 24 in exchange for the Overholt assets not covered by the Schulte-National agreement of June 9. It is the claim of the petitioners that the transfer of assets by Overholt to Geneva on June 24, for Geneva stock was a reorganization within the meaning of section 112(i)(1)(B) of the act and that the distribution of the 25,000 shares of Geneva stock to Distributing on June 28 was a distribution without recognition of gain within the meaning of section 112(g), supra.The respondent has made no determination that the gain realized by Overholt upon the transfer of assets to Geneva for Geneva stock is to be recognized. He does contend, however, that the transaction was not a reorganization under section 112(i)(1)(B), but an exchange within the provisions of section 112(b)(5), ⁵ and, not being a reorganization, the gain realized by Distributing upon the receipt of the Geneva stock in liquidation or partial liquidation of Overholt does not escape tax under section 112(g), but is to be recognized in full. The argument of the respondent in support of the proposition that there was no reorganization between Overholt and Geneva is not very clear. The inference seems to be that, since the declared purpose for the organization of Geneva and for its continued existence was the liquidation of the assets of Large and Overholt omitted under the Schulte-National agreement, there was no business purpose for its organization under the doctrine of the "Gregory case", presumably Gregory v. Helvering,293 U.S. 465">293 U.S. 465, and, therefore, no reorganization within the meaning of the statute. It may be that the respondent does not desire to press this argument, in as much as he has determined that Geneva is liable for excess profits tax, which liability is dependent upon the doing of business. Furthermore, Geneva did succeed to the business of Large, namely, that of selling an inventory of whiskey. At any rate, the respondent counters in his reply brief with the proposition that, even though the transfer by Overholt of part of its assets to Geneva for Geneva stock did constitute a reorganization within the meaning of section 112(i)(1)(B) and by reason thereof the gain attributable to the 19,787 89/153 shares acquired directly from Geneva escapes recognition, it may not be held that the gain attributable to the 5,212 64/153 shares similarly escapes recognition, since those shares had been received by Overholt in partial liquidation of Large and not as a part of the reorganization between Overholt and Geneva.

According to section 112(i)(1)(B), the term "reorganization" means "a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the tranferor or its stockholders or both are in control of the corporation to which the assets are transferred." In the instant case, Overholt transferred assets to Geneva for shares of Geneva stock and immediately after the transfer was in control of Geneva. Sec. 112(j). ⁶ The shares acquired directly from Geneva and the shares which had been received the previous day in partial liquidation of Large constituted more than 80 percent of all of the stock of Geneva and the claim that a reorganization under section 112(i)(1)(B) took place between Overholt and Geneva is not defeated by the fact that the ownership of the 5,212 64/153 shares of Geneva stock previously received was necessary to constitute ownership by Overholt of 80 percent or more of Geneva's stock outstanding. Rawco, Inc., Ltd.,37 B.T.A. 128">37 B.T.A. 128. As we have noted, however, the respondent contends that the gain realized by Distributing upon the receipt of the Geneva shares previously received by Overholt in partial liquidation of Large is not to escape recognition of gain, since those shares were not acquired in the reorganization between Overholt and Geneva. He cites no authority for this proposition, however, and makes little or no argument. In our opinion the argument is not well founded. The shares, even though not acquired directly from Geneva, were essential to the reorganization between Overholt and Geneva, since without them Overholt was not in control of Geneva, as the statute requires. Furthermore, if a reorganization under section 112(i)(1)(B) did occur between Overholt and Geneva, and we have held that it did, the 5,212 64/123 Geneva shares, even though received in partial liquidation of Large, were the shares of a corporation a party to the reorganization and the facts show that the plan of reorganization contemplated their distribution by Overholt to Distributing, its sole stockholder. Accordingly the gain realized by Distributing upon the receipt of the entire 25,000 shares of Geneva stock is not to be recognized and, since the Overholt stock had no basis in the hands of Distributing and there is therefore no necessity to consider any proration of such basis between the Geneva shares received on June 28 and the National shares and debentures received on June 30 (in that connection see A. W. Mellon, supra;Rudolph Boehringer,29 B.T.A. 8">29 B.T.A. 8; North American Utility Securities Corporation,36 B.T.A. 320">36 B.T.A. 320), it matters not in computing the amount of gain to be recognized whether it be said that the Geneva stock was distributed in partial liquidation of Overholt without the surrender by Distributing of its Overholt stock, as contemplated by section 112(g), or was distributed with other property, namely, National shares and debentures, in complete liquidation of Overholt within the meaning of section 112(c)(1).⁷

The next issue involves the liability of Large, Overholt, Geneva, and Distributing for excess profits tax. In their original and reply briefs the argument of the petitioners is that the excess profits tax "should and may still be held unconstitutional," and the claim that the said corporations could easily have relieved themselves of any claim for excess profits tax by declaring a greater capital stock tax value if they had thought the transactions with National might be held not to have been statutory reorganizations. A supplemental brief has been filed, however, in which it is argued that Distributing was not carrying on or doing business within the meaning of the statute.

According to the record, Distributing was organized in 1925. Its assets consisted of the stock of Overholt and stock of the West Overton Distilling Co. During the period here under consideration the latter corporation was not engaged in business and had no assets of value. Distributing's articles of incorporation were not introduced in evidence, and we are not advised as to the declared purposes for its organization. It does appear that shortly after its organization it acquired the stock of Overholt and continued to hold that stock throughout its existence. It was a business corporation and we have no doubt that as originally organized it was intended to manage or participate in the management of Overholt and there is some indication that on one or more occasions it received distributions from Overholt, which amounts in turn were distributed to its stockholders. While the receipt of dividends by a holding company and the distribution of the amounts so received to its stockholders may not alone be sufficient to constitute the carrying on or doing of business for the purpose of sustaining the excess profits tax, it is well established that the participation by a parent corporation in the management and direction of the affairs of its subsidiary are sufficient to bring it under the statute. Edwards v. Chile Copper Co.,270 U.S. 452">270 U.S. 452. Whatever may have been the activities of Distributing prior to June 9, 1933, and whether it may have been engaged in operations sufficient to bring it within the rule laid down in Edwards v. Chile Copper Co., supra, we are convinced from the record before us that it was not engaged in such activities from and after June 9, 1933, the date of the Schulte-National agreement. During that period its activities did not extend beyond the holding of the Overholt stock and the receipt and distribution in liquidation of the Geneva stock and the National stock and debentures. Undoubtedly it also performed such formal acts as might be required of a sole stockholder with respect to the disposition by Overholt of its business and assets and its succeeding liquidation. Such activities, in our opinion, did not constitute the carrying on or doing of business within the meaning of sections 215 and 216 of the National Industrial Recovery Act. Cf. Eaton v. Phoenix Securities Co., 22 Fed.(2d) 497; Rose v. Nunnally Investment Co., 22 Fed.(2d) 102; United Mercury Mines Co. v. Viley,20 Fed.Supp. 734. The petitioners are accordingly sustained in their claim that the respondent erred in determining that Distributing was liable for excess profits tax.

The petitioners do not claim that Large, Overholt, or Geneva were not carrying on or doing business within the meaning of the statute and the record would not support such a claim if it had been made. Overholt had been actively engaged in manufacturing and selling whiskey and there is nothing to indicate that it did not continue such activities up to June 30, 1933. Large was engaged principally in the selling of whiskey and that activity certainly continued until June 23, 1933, when it transferred its whiskey inventory to Geneva, while Geneva from and after June 23 succeeded to the business previously conducted by Large, namely, that of selling a substantial inventory of whiskey. In the light of these facts and the further fact that the question as to the constitutionality of the excess profits tax has been previously decided adversely to the petitioners, Briggs-Darby Construction Co.,41 B.T.A. 136">41 B.T.A. 136; Chicago Telephone Supply Co. v. United States (Ct. Cls.), 35 Fed.Supp. 471, the respondent is sustained in his determination that Large, Overholt, and Geneva are liable to excess profits tax for the year before us.

The petitioners next claim that the respondent has committed certain errors in computing and determining the gain realized by Geneva and Distributing. The gain of Geneva resulted from the distribution to it by Large of 15,099 shares and $89,000 principal amount of debentures of National. In computing the gain realized by Large on receipt of the National shares and debentures, the respondent recognized the effect of the option held by Lehman Brothers and valued the shares so received by Large in proper proportions at $56, $61, and $97.75 per share. In computing the gain of Geneva, he ignored the effect of the option and valued the entire 15,099 shares received by it in liquidation of Large at $97 5/8 per share and used the gain so computed in determining the deficiency against Geneva. On the same date that Large received the National shares and debentures for that portion of its assets transferred to the L.D. Corporation, it distributed the said shares and debentures to its stockholders in liquidation. The shares so distributed were subject to the option of Lehman Brothers in the hands of the stockholders of Large just as much as they were subject to the option in the hands of Large, and there is no justification for the respondent's determination that the entire 15,099 shares received by Geneva had a value of $97 5/8 per share. The values used for the said stock in computing the gain of Large are, in our opinion, correct, and those values should be applied according to the same ratios in computing the gain of Geneva. Similarly, there is an inconsistency in the values used by the respondent in determining the gain realized by Overholt upon receipt of the National shares and debentures in exchange for that portion of its assets transferred to the A. O. Corporation and in determining the gain realized by Distributing upon the receipt of the said National shares and debentures in liquidation of Overholt. The value used by the respondent in computing the gain realized by Distributing is, in our opinion, erroneous in as much as he failed to take into consideration the option held by Lehman Brothers. The gain of Distributing should accordingly be computed by using in proper ratios the values used for the National stock in computing the gain of Overholt.

In the light of our conclusions previously stated with respect to the distribution to Distributing by Overholt of the 25,000 shares of Geneva stock, it becomes unnecessary to consider the differences between the parties with respect to the value of the Geneva shares when so distributed.

The petitioners make the further claim that the respondent in determining the gain realized by Geneva and Distributing from the liquidation of Large and Overholt, respectively, has not made allowance for the liability of those corporations for any income and excess profits taxes for which they were liable. The respondent admits that no such allowance has been made, making some reference to the fact that what ever the liabilities of Large and Overholt may have been, those liabilities were not satisfied or paid by Geneva and Distributing, and are not therefore to be taken into consideration in determining the gain realized by them upon the liquidation of Large and Overholt. The contention of the respondent is not exactly clear, but his counsel seems to have confused the contention of the petitioners with a claim of deduction for taxes paid. To the contrary, the substance of the contention is that Geneva and Distributing received the assets of Large and Overholt in liquidation, subject to any unpaid liabilities of Large and Overholt for income and excess profits taxes and that such unpaid liabilities must be taken into consideration in determining the amount of gain realized by them as stockholders of Large and Overholt, just as would have been the case with any other unpaid liabilities of those corporations. The claim is not a claim for the deduction of taxes paid and the petitioners are sustained in their contention. Cf. T. H. Symington & Son, Inc.,35 B.T.A. 711">35 B.T.A. 711. In this connection, however, the petitioners contend that Distributing, in determining its gain upon the liquidation of Overholt, is also entitled to offset an amount equal to 83.33 percent of any deficiency in income and excess profits taxes for which Geneva is liable. There is no merit in that contention. None of the assets received by Distributing were subject to any liability of Geneva. Distributing at one time and for a period of approximately four days held 25,000 shares of Geneva stock, but on June 28 those shares were distributed by it to its stockholders as a step in liquidation. At no time did Distributing receive any distribution of assets in liquidation of Geneva.

The petitioners contend that the right of assessment against them of any transferee liability for the income and excess profits taxes of Large, Overholt, Distributing, and Geneva expired prior to the mailing of the notices of determination herein. The following is a tabular statement of the dates on which the returns of the indicated corporations were filed, the date of expiration of the period for making assessment against each such corporation, and the dates on which respondent sent notices to petitioners of transferee liability in respect of the tax of such corporations:

	Return filed	Limitations expired	Transferee notices
Large	Mar. 7, 1934	Mar. 7, 1936
Overholt	Mar. 7, 1934	Mar. 7, 1936
			Feb. 25, 1937, notices to petitioners who were stockholders of the Distributing Co., asserting transferee liability in respect of tax of that company.
Distributing Co	Mar. 8, 1934	Mar. 8, 1936	Mar. 5, 1938, notices to petitioners who were stockholders of Distributing Co., asserting transferee liability in respect of tax of Overholt.
			Mar. 5, 1938, notices to petitioners who were stockholders of Geneva, asserting transferee liability in respect of tax of Geneva.
Geneva	Mar. 10, 1934	1 June 30, 1937	Mar. 5, 1938, notices to petitioners who were stockholders of Geneva, asserting transferee liability in respect of tax of Large.

No part of the deficiencies against Large, Overholt, Distributing, and Geneva has been assessed or paid. The distributions made in June 1933 by Large, Overholt, and Distributing rendered them without assets and the distributions made then and in December 1934 and January 1935 have left Geneva with approximately $55,000, an amount insufficient to discharge the deficiency in its tax.

It is the contention of the petitioners that in as much as the period for assessment of the tax against the transferors, namely, Large, Overholt, Geneva, and Distributing, expired without the assessment of the deficiencies claimed herein, sections 275(a) ⁸ and 276(c) ⁹ of the Revenue Act of 1932, the liability of those corporations for tax was extinguished, section 607 of the Revenue Act of 1928, ¹⁰ and accordingly no transferee liability exists which may be assessed against these petitioners.

Claims against transferees are controlled by the provisions appearing under sections 311 and 312, supplementing the Revenue Act of 1932, and in subsection (b) of section 311 it is provided that the period for limitation of assessment shall be "In the case of the liability of an initial transferee of the property of the taxpayer, - within one year after the expiration of the period of limitation for assessment against the taxpayer", and "In the case of the liability of a transferee of a transferee of the property of the taxpayer, - within one year after the expiration of the period of limitation for assessment against the preceding transferee, but only if within three years after the expiration of the period of limitation for assessment against the taxpayer." In Gideon-Anderson Co.,20 B.T.A. 106">20 B.T.A. 106, involving facts substantially similar to those presented here, the same question was presented with respect to the corresponding provisions of the Revenue Act of 1926, and we held adversely to the claim of the petitioners. Later the question was presented in City National Bank v. Commissioner, 55 Fed.(2d) 1073, affirming 19 B.T.A. 1080">19 B.T.A. 1080; certiorari denied, 286 U.S. 561">286 U.S. 561. In also holding adversely to the petitioners, the court said:

It is also contended that the transferee cannot be held, because under section 1106(a) 26 U.S.C.A. § 1249 note, the statute of limitations not only operates to bar the remedy but extinguishes the liability. A complete answer to that contention is that limitation had not run against the transferee, because the assessment of its liability was made within the year allowed by section 280(b)(1) after the expiration of the period of limitation for assessment against the taxpayer.

To concede the contention of the petitioners would require us to hold that before the Commissioner could proceed against transferees after the expiration of the period of limitations applicable to the transferor he is required to assess the tax against the transferor prior to the expiration of the period of limitations applicable to the transferor. In practically all cases, as here, such action would mean assessing tax against transferors entirely or substantially devoid of assets, which would be a futile and useless act. This question was considered and disposed of adversely to the petitioners in Flynn v. Commissioner, 77 Fed.(2d) 180, affirming 28 B.T.A. 578">28 B.T.A. 578, wherein the facts were comparable to those presented here and the transferee provisions were those of the Revenue Act of 1928.

Finding nothing in the instant proceedings and the above quoted statutory provisions or in the argument of the petitioners in connection therewith which would justify our reaching a conclusion here different from that reached in the Gideon-Anderson Co., City National Bank, and Flynn cases, we deny the contention of the petitioners. See also A. R. McLennan,25 B.T.A. 1052">25 B.T.A. 1052; England Walton & Co.,25 B.T.A. 1091">25 B.T.A. 1091; Newport Co.,24 B.T.A. 1246">24 B.T.A. 1246; Federal Oil Corporation,24 B.T.A. 622">24 B.T.A. 622; J. A. Kemp,20 B.T.A. 875">20 B.T.A. 875. Cf. Catharine D. Sharpe,38 B.T.A. 502">38 B.T.A. 502; affd., 107 Fed.(2d) 13; certiorari denied, 309 U.S. 665">309 U.S. 665.

On brief the respondent concedes that the period of limitations had run at the time of sending transferee notices to the following named petitioners with respect to the indicated amounts of National stock and debentures distributed to them by Large on June 30, 1933, and that they were not transferees of transferees with respect to such distributions:

	National shares	National debentures
Park & Tilford	8,282.761	$48,611.11
1931 Corporation	3,242.109	19,027.77
M. J. Witman	1,183.252	6,944.45
Arthur S. Meyer	1,183.252	6,944.45
J. Donovan Pheifer	591.626	3,472.22
Total	14,483.ooo	85,000.00

We have set out in our findings of fact the distributions made by Large, Overholt, Distributing, and Geneva on June 30, 1933 (and subsequently in the case of Geneva), the persons to whom they were made, and what each received. The recipients received such distributions without payment of value therefor and as a result thereof the corporations were rendered insolvent and unable to discharge their corporate liability for taxes, and in the case of Distributing and Geneva their liabilities as transferees of Overholt and Large, respectively. Except to the extent conceded otherwise by the respondent, as stated above, we conclude that the petitioners are transferees, direct or indirect, of the assets respectively received by them to the extent of the value of such assets at the time of their receipt as indicated in our findings of fact, in respect of the taxes of the corporation of which they were respectively transferees, direct or indirect.

In the recomputations of the liabilities of the petitioners to be submitted under Rule 50, effect will be given to the stipulation of the parties which has been set out in our findings of fact.

Reviewed by the Board.

Decisions will be entered under Rule 50.

---

Footnotes

• 1. Proceedings of the following petitioners are consolidated herewith: 1931 Corporation; Magnus J. Witman; Estate of Thomas L. Chadbourne, deceased. Humphrey W. Chadbourne and Waldeman A. Chadbourne, Executors; Louis S. Levy; William Wallace, Jr.; William M. Parke; Louis G. Bissell; Frederick Hoff; Henry J. Woiff; Irma B. Levy; Carrie E. Schulte; Estelle E. Frank; Nancy G. Handren; Arthur S. Meyer; J. Donovan Pheifer. ↩

• 1. The greater part of this whiskey was under contract of sale to National dating from June 9, 1933. The balance was under contract to Schenley. ↩

• 2. On June 30, 1933, Geneva, as a distribution in liquidation of the 638 shares of Large stock received 15,099 shares of common stock and $89,000 principal amount of debentures of National and on the same day distributed the said stock and debentures to its stockholders as set out supra.↩

• 1. SEC. 112. RECOGNITION OF GAIN OR LOSS.

  (a) GENERAL RULE. - Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 111, shall be recognized, except as hereinafter provided in this section.

  * * *

  (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, are substantially all the properties of another corporation), * * * ↩

• 2. (b) EXCHANGES SOLELY IN KIND. -

  * * *

  (4) SAME - GAIN OF CORPORATION. - No gain or loss shall be recognized if a corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization. ↩

• 3. (b) EXCHANGES SOLELY IN KIND. -

  * * *

  (3) STOCK FOR STOCK ON REORGANIZATION. - No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization. ↩

• 4. (g) DISTRIBUTION OF STOCK ON REORGANIZATION. - If there is distributed, in pursuance of a plan of reorganization, to a shareholder in a corporation a party to the reorganization, stock or securities in such corporation or in another corporation a party to the reorganization, without the surrender by such shareholder of stock or securities in such a corporation, no gain to the distributee from the receipt of such stock or securities shall be recognized. ↩

• 5. (5) TRANSFER TO CORPORATION CONTROLLED BY TRANSFEROR. - No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange. ↩

• 6. (j) DEFINITION OF CONTROL. - As used in this section the term "control" means the ownership of at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares of all other classes of stock of the corporation. ↩

• 7. (c) GAIN FROM EXCHANGES NOT SOLELY IN KIND. -

  (1) If an exchange would be within the provisions of subsection (b)(1), (2), (3), or (5) of this section if it were not for the fact that the property received in exchange consists not only of property permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property. ↩

• 1. On January 8, 1936, consent was filed extending period to June 30, 1937. ↩

• 8. SEC. 275. PERIOD OF LIMITATION UPON ASSESSMENT AND COLLECTION.

  Except as provided in section 276 -

  (a) GENERAL RULE. - The amount of income taxes imposed by this title shall be assessed within two years after the return was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period. ↩

• 9. SEC. 276. EXCEPTIONS.

  * * *

  (c) COLLECTION AFTER ASSESSMENT. - Where the assessment of any income tax imposed by this title has been made within the period of limitation properly applicable thereto, such tax may be collected by distraint or by a proceeding in court, but only if begun (1) within six years after the assessment of the tax, or (2) prior to the expiration of any period for collection agreed upon in writing by the Commissioner and the taxpayer before the expiration of such six-year period. The period so agreed upon may be extended by subsequent agreements in writing made before the expiration of the period previously agreed upon. ↩

• 10. SEC. 607. EFFECT OF EXPIRATION OF PERIOD OF LIMITATION AGAINST UNITED STATES.

  Any tax (or any interest, penalty, additional amount, or addition to such tax) assessed or paid (whether before or after the enactment of this Act) after the expiration of the period of limitation properly applicable thereto shall be considered an overpayment and shall be credited or refunded to the taxpayer if claim therefor is filed within the period of limitation for filing such claim. ↩