*188 Decisions will be entered under Rule 50.
In 1943 petitioner corporation distributed in liquidation 47,000 shares of Transamerica Corporation stock to its stockholders, which stock was then pledged with creditors as security for certain notes of the petitioner corporation. Thereafter, the stockholders sold the stock to one of the creditors and the proceeds of the sale were applied in payment of the loans for which the shares were held as security. Petitioner, in order to secure cash with which to pay its debts and carry out its proposed liquidation, canceled two notes held by it which were secured by second mortgages in consideration of the debtor making payment to the extent of 60 per cent of their face value. Held:
(1) That the petitioner corporation realized no taxable income in 1943 as a result of the sale of the 47,000 shares of Transamerica stock by its stockholders.
(2) That the petitioner corporation is entitled to a deduction in 1943 in the amount of $ 43,577.50 as a loss under section 23 (f) of the Internal Revenue Code arising from the compromise settlement of the indebtedness.
*947 The above entitled cases were consolidated for hearing in this proceeding. Respondent determined deficiencies in the income tax, declared value excess profits tax, and personal holding company surtax of petitioner West Coast Securities Co. in the following amounts for the period January 1, 1943, to and including August 31, 1943, at which time the corporation was dissolved:
| Income tax | $ 29,949.56 |
| Declared value excess profits tax | 4,318.59 |
| Personal holding company surtax | 6,292.91 |
| Total | 40,561.06 |
*190 *948 Petitioner corporation claims an overpayment of income tax for 1943 in the amount of $ 18,519.54.
Respondent also asserted transferee liability against individual stockholders of West Coast Securities Co. for the tax deficiencies of the corporation in 1943, as transferees of the assets of the company on dissolution. Respondent limited the liability of each shareholder to the amount of cash he received from petitioner corporation as a liquidating distribution on August 25, 1943, in the following manner:
| Dorothy Stewart | $ 2,491.14 |
| Marie McDonough | 2,491.14 |
| W. E. Clayton, Jr | 2,491.14 |
| Irene Kinner | 2,075.95 |
| Mary C. Smith | 2,075.95 |
| Dan S. Hewitt | 7,473.42 |
| W. A. Rabbett | 7,473.42 |
| L. E. Heller | 7,473.42 |
| C. L. Braskamp | 7,473.42 |
| Total | 41,519.00 |
The questions presented for our determination in this proceeding are:
(1) Did petitioner corporation realize taxable income in 1943 from the sale of Transamerica Corporation stock which it had previously distributed to its shareholders in liquidation?
(2) Was petitioner corporation entitled to a bad debt deduction, a capital loss deduction, or an ordinary loss deduction in 1943 as the result of the compromise settlement*191 of certain notes with the maker?
(3) In the event petitioner corporation was not entitled to the above deduction, did the total interest accrued on the notes canceled in the compromise settlement constitute taxable income?
(4) Was petitioner corporation subject to a personal holding company surtax in 1943, although it distributed assets to its shareholders and dissolved that year?
(5) In the event that petitioner corporation was liable for tax deficiencies for 1943, what was the limit of the transferee liability of each of its shareholders?
FINDINGS OF FACT.
Part of the facts were stipulated and are so found.
Petitioner West Coast Securities Co. (hereinafter sometimes referred to as West Coast) was incorporated under the laws of the State of California on July 14, 1937. It completed voluntary dissolution proceedings under the provisions of section 400 of the California Civil Code on August 31, 1943, and now exists as a body corporate pursuant to the provisions of section 399 of the California Civil Code for the purpose of this proceeding. Its office address is 206 Sansome Street, San Francisco, California. West Coast filed its returns for the year 1943 with the collector of internal*192 revenue for the first district of California. The nine individual petitioners are residents of California and apparently filed their returns with the collector for the first district of California.
*949 West Coast was organized by a group of individuals closely associated with A. O. Stewart, a San Francisco financier, either as his employees or as employees of companies with which he was associated. Stewart had suggested to them in 1937 that if they would organize a corporation and purchase securities and other property recommended by him, and would manage these assets, he would assist them in establishing credit with which to operate the business. During its corporate existence he arranged credit for petitioner corporation and in turn was allowed to pledge securities owned by West Coast for his personal loans and market operations. Though Stewart was thus closely identified with the corporation, he was not a stockholder, officer, or director.
By its articles of incorporation, West Coast was authorized to engage in a general investment business having the right to purchase and sell stocks, bonds, notes, mortgages, and property, to own and operate real estate, and to do all*193 things necessary for successful operation of its business. The outstanding capital stock of the company consisted of 1,000 shares of no par value common stock issued at 50 cents a share. The first president of the corporation was Harley Kise, who held that position until late 1942. At that time W. A. Rabbett became president, and he continued in that office until the corporation dissolved in 1943.
West Coast operated at a profit until 1941, but thereafter it suffered losses, with the result that by January 1, 1943, it had an operating deficit of $ 111,863. On succeeding to the presidency of petitioner corporation Rabbett investigated the financial status of the company and determined that the existing financial situation early in 1943 was unfavorable, for war conditions had caused shrinkage and losses in the corporation's security portfolio and market conditions were unstable. Furthermore, West Coast was a personal holding company and it was necessary to distribute current earnings to stockholders to avoid the personal holding company surtax on undistributed income. Rabbett believed that if the company continued operating under such circumstances it would never be able to make*194 up its deficit, pay its debts, and accumulate any equity for its shareholders. Due to these conclusions, Rabbett discussed dissolution of West Coast with the board of directors early in the spring of 1943. In May, 1943, he obtained permission from the directors to get the advice of a tax attorney concerning the best procedure for dissolving West Coast.
In the ensuing consultations between Rabbett and the tax attorney a topic of discussion was the proper disposition of 47,000 shares of Transamerica Corporation (hereinafter referred to as Transamerica) stock, the chief assets owned by West Coast. To secure its indebtedness existing on two promissory notes to the order of Transamerica in the face amounts of $ 410,292.96 and $ 33,175, petitioner corporation *950 had pledged various securities, including 14,600 shares of this stock. As security for two promissory notes in the face amounts of $ 315,875 and $ 89,300 to the order of the Bank of America National Trust & Savings Association (hereinafter referred to as the Bank of America) petitioner corporation had pledged the remaining 32,400 shares of Transamerica stock it owned. The market value of this stock in the spring of 1943*195 was considerably higher than its adjusted cost basis to West Coast of $ 310,590.20. Tax counsel advised Rabbett that in dissolving petitioner corporation the best way to accomplish payment of the debts for which the stock was pledged and also leave some equity for the shareholders by avoiding the capital gains tax which would result if West Coast sold the stock, was to distribute this stock in kind to the stockholders, letting them sell it and apply the proceeds to the pledged notes. With this goal in mind, the attorney prepared a complete plan and schedule for dissolution and liquidation of West Coast which the officers of the company subsequently carried out.
At first, liquidation of petitioner corporation was scheduled for June, 1943, and all the necessary papers and minutes were prepared, but, because of unfavorable market conditions for sale of the Transamerica stock and delay caused by unsuccessful attempts to dispose of certain promissory notes of J. L. Stewart held by West Coast, the liquidation was postponed until July of that year.
Liquidation of West Coast commenced on July 19, 1943, when all its stockholders signed and filed with the corporation both a written consent*196 to the voluntary winding up and dissolution of the corporation and a written consent to distribution in kind of assets of the corporation to them upon liquidation. At that time, the following individuals owned the 1,000 shares of West Coast stock outstanding:
| L. E. Heller | 180 |
| Dan S. Hewitt | 180 |
| C. L. Braskamp | 180 |
| W. A. Rabbett | 180 |
| Marie McDonough | 60 |
| W. E. Clayton, Jr | 60 |
| Dorothy Stewart | 60 |
| Irene Kinner | 50 |
| Mary C. Smith | 50 |
| Total | 1,000 |
On July 20, 1943, the president and vice president of petitioner corporation executed a "Certificate of Election of West Coast Securities Company to Wind Up and Dissolve," which certificate was filed with the Secretary of State of the State of California at Sacramento on July 21, 1943.
Also, on July 20, 1943, at 10 a. m., the board of directors of petitioner corporation held a special meeting, at which they acknowledged receipt of the stockholders' consents and authorized the officers to perform all acts necessary to distribute corporate assets to the stockholders and complete the winding up and dissolution of West Coast. The secretary was authorized to give written notice of *951 the commencement of dissolution proceedings*197 to all shareholders and creditors of the corporation.
On the same day, at 1:30 p. m., the board of directors of West Coast held another special meeting, at which they authorized the immediate distribution to stockholders of the corporation's 47,000 shares of Transamerica stock, subject to their pledge to secure indebtednesses of petitioner corporation to the Bank of America and Transamerica.
Still on the same day, pursuant to the authorization of the board of directors, West Coast distributed 47,000 shares of Transamerica stock to its stockholders, subject to the indebtednesses for which the stock was pledged, by executing a bill of sale and delivering an executed copy thereof to each shareholder, transferring to each stockholder according to his proportionate stockholding in the company a certain number of shares of Transamerica stock. These shares of Transamerica stock, still issued in the name of West Coast and endorsed by it in blank, remained in the possession of the Bank of America and Transamerica.
On July 20 West Coast sent separate notices of its dissolution proceedings and also of the distribution of its Transamerica stock to both the Bank of America and Transamerica. *198 The two notices to the Bank of America were sent through the mail and were delivered on July 21. The letter concerning the distribution of Transamerica stock informed the bank that from this day the shareholders of West Coast were owners of all 47,000 shares of this stock.
The notice of commencement of dissolution proceedings sent to Transamerica was delivered to W. L. Andrews, vice president and treasurer of the company, by Clayton, who was both secretary and a stockholder of West Coast, on the morning of July 20. A notice of distribution of the 47,000 shares of Transamerica stock similar to the one mailed to the Bank of America was also delivered to Andrews by Clayton late on the afternoon of July 20. It was known by the officers of West Coast that Transamerica was buying up its outstanding stock for retirement, and after Clayton delivered the notice, he, as the representative of the West Coast stockholders, asked Andrews if Transamerica would buy their 47,000 shares of Transamerica stock. Andrews replied that Transamerica would buy them at the closing stock market price of 8 7/8 per share on July 20 if the stockholders of West Coast would accept the offer promptly. Following*199 this conversation, Clayton returned to his office, advised the assembled West Coast stockholders of the offer, and received their permission to proceed with the sale of stock on the terms stated by Andrews.
On July 21 West Coast reduced its indebtednesses to the Bank of America for which the Transamerica stock was pledged by payment of $ 132,452.94 on the principal of its two notes held by the bank. Payment *952 of this sum, together with previous payments, served to cancel the $ 89,300 note and left a balance of $ 69,328.31 owing on the principal of the $ 315,875 note. On the same date petitioner corporation also paid interest of $ 536.99 and $ 55.29 on its two promissory notes to the order of Transamerica, for which the Transamerica stock was pledged, thereby reducing the total indebtedness on these notes to $ 314,621.69 and $ 33,175, respectively, or a total of $ 347,796.69.
On the same day, a letter signed by the stockholders of West Coast was mailed to Transamerica, notifying it that the stockholders confirmed the arrangement negotiated between Andrews and Clayton on July 20 for sale of the 47,000 shares of Transamerica stock for $ 417,125, based on a price of $ 8.875 *200 per share. Attached to the letter was a bill of sale signed by the shareholders transferring the 47,000 shares of stock to Transamerica. By the same letter, the West Coast shareholders authorized Transamerica to pay $ 69,328.31 of the proceeds of sale to the Bank of America for application against the balance of the indebtedness for which the Transamerica stock was pledged and to credit the rest of the proceeds in the amount of $ 347,796.69 against the remaining indebtednesses of petitioner corporation to Transamerica for which the Transamerica stock was pledged.
Also on July 21 stockholders of West Coast signed and mailed a letter to the Bank of America stating that they were this day paying $ 69,328.31 on the indebtedness of West Coast to it and requesting that after payment the bank deliver to Transamerica the 32,400 shares of Transamerica it held as a pledge.
On July 21, 1943, after receipt of the letter from West Coast stockholders, Transamerica issued a check to the Bank of America in the amount of $ 69,328.31 to pay the indebtedness owing on the note of West Coast. On July 22 the Bank of America notified petitioner corporation that the note was paid in full and canceled, *201 and it delivered the 32,400 shares of Transamerica stock it held to Transamerica. On July 21 Transamerica applied the remaining proceeds of the sale of stock in the amount of $ 347,796.69 to the balance owing on the notes of West Coast. It notified West Coast of the cancellation of the notes on the following day.
Thus, the entire proceeds of the sale of the Transamerica stock by the stockholders of West Coast were applied to cancel out the balance owing on the notes of West Coast held by the Bank of America and Transamerica, for which the stock was pledged. West Coast made no further distribution in kind of the remaining securities it owned. Its stockholders reported the sale of the Transamerica stock on their income tax returns for 1943.
The sale of 47,000 shares of Transamerica stock on July 21, 1943, was made by petitioner's stockholders and not by petitioner and the latter realized no taxable gain from such sale.
*953 Petitioner in no way participated in negotiations between its stockholders and Transamerica prior to the sale or in the actual sale itself, nor did it exercise any control over the proceeds of the sale.
Among the other assets which petitioner corporation *202 owned in July, 1943, were two promissory notes signed by J. L. Stewart, brother of A. O. Stewart. The origin of the first note was on July 20, 1937, when the Pacific Coast Joint Stock Land Bank (hereinafter referred to as Pacific Coast) sold J. L. Stewart a parcel of improved real estate known as the Crest View Apartments for $ 429,500, of which $ 300,000 was paid in cash and the remaining $ 129,500 was evidenced by a promissory note signed by J. L. Stewart and his wife. The note bore interest of 5 per cent per annum, and was payable in monthly installments of $ 455 on account of principal, the total unpaid amount to be due on July 6, 1947, and the note to be secured by a second deed of trust on the property. To make the $ 300,000 cash payment J. L. Stewart secured a loan of $ 300,000 from the Metropolitan Life Insurance Co. (hereinafter referred to as Metropolitan), which loan was secured by a first deed of trust on the Crest View Apartments and a chattel mortgage on the furniture therein. The first trust deed note dated July 16, 1937, was signed by J. L. Stewart and his wife, bore interest of 5 per cent per annum, and was payable in semiannual installments of $ 3,000 on account*203 of principal from October 1, 1938, until October 1, 1947, when the entire unpaid balance became due.
On March 31, 1938, Pacific Coast sold the J. L. Stewart second trust deed note, then having an unpaid principal balance of $ 126,015, by endorsement and delivery to Western Land Securities Co. (hereinafter referred to as Western Land) for a price of $ 101,812.
On December 1, 1941, Western Land, whose stockholders at the time were the same persons who were stockholders of petitioner corporation, sold the note, which then had an unpaid balance of $ 108,270, by endorsement and delivery to West Coast for a price of $ 108,270.
On March 31, 1941, Western Land apparently loaned J. L. Stewart $ 6,428.81, for which amount Stewart gave his note dated March 31, 1941, payable to Western Land one year after date and bearing interest of 5 per cent per annum. The note was secured by a second deed of trust on garage property contiguous to the Crest View Apartments, which J. L. Stewart had purchased in 1938 at a cost of $ 16,500 and which on March 31, 1941, was encumbered by a mortgage held by the Hibernia Bank, San Francisco, on which $ 12,664.34 was due. On December 1, 1941, Western Land sold the*204 Crest View garage note to petitioner corporation for the balance of $ 6,428.81 owing on it.
In the spring of 1943, when West Coast was contemplating dissolution, its directors agreed cash had to be realized quickly on the two Stewart notes in order to meet its debts.
On July 14, 1943, petitioner corporation offered to sell both Stewart *954 notes to Transamerica at a reasonable discount. In a reply letter, Transamerica stated it would not consider purchasing the notes for more than 50 cents on the dollar of the principal amounts. This answer was based in part on an appraisal report made by the Bank of America some nine months earlier which set the value of the Crest View Apartments at $ 300,000 and the value of the Crest View garage at $ 20,000.
By letter to the Bank of America dated July 17, 1943, petitioner corporation stated its desire to dispose of the two Stewart notes and asked what would be a fair discount at which such notes could be sold. The Bank of America replied that neither of these notes would be eligible for investment of national bank funds and therefore it would have no interest in purchasing the notes, regardless of the amount of discount offered. Furthermore, *205 it considered that it would probably be necessary to offer a discount of as much as 50 per cent in order to attract a purchaser for either note. This view was largely based on an appraisal of the properties securing the notes made by the bank on September 28, 1942, which report was mentioned above.
On July 15, 1943, petitioner corporation requested the San Francisco Real Estate Board to make an appraisal of the Crest View Apartments and garage. Pursuant to this request, the real estate board submitted an appraisal on August 4, 1943, which valued the apartments at $ 300,000 and the garage at $ 25,000.
After replies had been received from Transamerica and the Bank of America concerning the disposability of the Stewart notes, the board of directors of West Coast, on July 20, authorized an officer of the company to negotiate with J. L. Stewart for settlement of the notes, for they were anxious to pay off the company's obligations and complete liquidation of the corporation as quickly as possible. Pursuant to this authorization, W. A. Rabbett commenced active negotiations with J. L. Stewart seeking to reach a settlement based on the valuation of the notes made by Bank of America and*206 Transamerica. On August 5, 1943, there was a balance due of $ 99,625 on the second trust deed note secured by the Crest View Apartments. There had been no default in the payment of principal or interest thereon. There was still a balance of $ 270,000 due on the first trust deed note held by Metropolitan, although all payments had been met. On the same date there was a balance due of $ 6,428.81 in principal, plus interest of $ 754.52, or a total of $ 7,183.33, on the second trust note secured by the Crest View garage. No payment had been made on its principal or interest. A balance of $ 11,012.38 was due on the Hibernia Bank first trust note at this time. Thus, the principal due on both Stewart notes held by West Coast amounted to $ 106,053.81 on August 5, 1943.
At the time of these negotiations, J. L. Stewart owned cash of *955 $ 25,000, Toll Bridge Authority stock worth approximately $ 6,000, an equity in homes he was constructing for war workers, upon the sale of which he reported a net profit of approximately $ 44,000 at the close of 1943, and St. Louis & San Francisco Railway bonds in the amount of about $ 240,000 purchased in July, 1943, with money borrowed from the*207 Bank of America. This loan had been guaranteed by his brother, A. O. Stewart.
On August 6 petitioner corporation and J. L. Stewart agreed to settle both notes at a 40 per cent discount and J. L. Stewart paid $ 63,632.35 to the company in return for cancellation of the notes on that date. Almost $ 25,000 of this payment constituted cash owned by J. L. Stewart, while $ 39,000 represented a loan from A. O. Stewart. Rabbett felt the cash settlement represented the fair market value of the notes at this time. West Coast credited the payment in settlement of the notes on its books as follows: $ 6,428.81 to the principal amount due on the Crest View garage note; $ 754.58 to accrued interest receivable for interest due on the Crest View garage note; $ 56,047.50 to the principal amount due on the Crest View Apartments note; and $ 401.46 to accrued interest receivable for interest due on the Crest View Apartments note. By this assignment by West Coast of the undesignated payment, the principal and interest on the Crest View garage note was completely paid up as was the interest on the Crest View Apartments note. On its books, West Coast charged off the balance due on the Crest View Apartments*208 note of $ 43,577.50 as a bad debt. In 1946 the Crest View Apartments were sold for approximately $ 565,000.
During 1943 petitioner corporation accrued monthly as income on its books interest on the Crest View garage note in the aggregate amount of $ 201.07 and interest on the Crest View Apartments note in the aggregate amount of $ 2,932.42 and reported the total of these two amounts, or $ 3,133.49, as taxable interest income on its 1943 income tax returns. All but $ 401.46 of the accrued interest on the Crest View Apartments note was paid in monthly installments prior to the date of settlement with J. L. Stewart.
On August 25, 1943, petitioner corporation distributed its remaining assets to its stockholders, which consisted of cash equal to $ 41,519 per share, for after the distribution of the Transamerica stock, West Coast sold all its other securities for cash. The cash distributed to each shareholder was as follows:
| W. A. Rabbett | $ 7,473.42 |
| Dan S. Hewitt | 7,473.42 |
| C. L. Braskamp | 7,473.42 |
| L. E. Heller | 7,473.42 |
| W. E. Clayton, Jr | 2,491.14 |
| Marie McDonough | 2,491.14 |
| Dorothy Stewart | 2,491.14 |
| Irene Kinner | 2,075.95 |
| Mary C. Smith | 2,075.95 |
| Total | 41,519.00 |
*956 *209 On August 27, 1943, the board of directors of West Coast held a special meeting and ratified all acts of the officers of the corporation in connection with the dissolution of the corporation and the liquidation and distribution of its assets.
On August 30, 1943, officers of West Coast executed a "Certificate of Winding Up and Dissolution of West Coast Securities Company," which certificate was filed with the Secretary of State of the State of California on August 31, 1943.
Petitioner corporation filed a corporation income and declared value excess profits tax return for the year 1943. On this return it claimed a bad debt deduction of $ 43,577.50, due to the compromise of the Crest View Apartments note. It did not report the sale of 47,000 shares of Transamerica stock. It also filed a personal holding company return for 1943, reporting thereon no undistributed subchapter A net income and consequently disclaiming any surtax liability.
A Form 870 agreeing to immediate assessment of a tax deficiency of $ 18,519.50 against petitioner corporation for 1943, proposed in a revenue agent's report dated June 28, 1946, and resulting from the disallowance of the bad debt deduction claimed by*210 West Coast, was filed by West Coast with the internal revenue agent in charge at San Francisco on or about June 27, 1946. No formal agreement under section 3760 or section 3761 of the code was ever executed by West Coast and the Government relating to the disallowance of the bad debt deduction. As a result of filing Form 870, an additional tax was assessed against West Coast, which it paid on or about September 4, 1946, in the amount of $ 18,519.54, and interest thereon in the amount of $ 3,002.70, or a total of $ 21,522.24.
To enable the corporation to meet this obligation, stockholders of West Coast at the time of its dissolution contributed the following amounts of cash to the company on September 3, 1946:
| W. A. Rabbett | $ 3,874.00 |
| Dan S. Hewitt | 3,874.00 |
| C. L. Braskamp | 3,874.00 |
| L. E. Heller | 3,874.00 |
| W. E. Clayton, Jr | 1,291.34 |
| Marie McDonough | 1,291.34 |
| Dorothy Stewart | 1,291.34 |
| Irene Kinner | 1,076.11 |
| Mary C. Smith | 1,076.11 |
| Total | 21,522.24 |
The amount paid by each individual was in proportion to his former stockholdings in West Coast.
As the result of a supplemental report filed by a revenue agent on December 23, 1946, a notice of deficiency was sent to petitioner*211 corporation on March 12, 1947, determining deficiencies in its income tax, declared value excess profits tax, and personal holding company surtax for the taxable period January 1, 1943, to August 31, 1943. Respondent disallowed the bad debt deduction of $ 43,577.50 claimed by West Coast and included as income long term capital gain on the *957 sale of Transamerica stock to Transamerica in the amount of $ 106,534.80. In determining a deficiency in West Coast's personal holding company surtax, respondent computed petitioner corporation's undistributed subchapter A net income to be $ 87,016.85, by limiting the amount which it treated as "taxable dividends paid" to the $ 41,519 cash which West Coast distributed to its stockholders on August 25, 1943.
On March 12, 1947, respondent sent notices of transferee liability to the former shareholders of West Coast, asserting against each of them, as a transferee of assets of West Coast, portions of the income tax, declared value excess profits tax, and personal holding company surtax deficiencies of West Coast in a total amount limited to the cash distributed to him on liquidation of the corporation.
On March 14, 1947, petitioner corporation*212 filed a claim for refund of taxes overpaid in 1943 in the amount of $ 21,151.85 on the basis that the bad debt deduction of $ 43,577.50 claimed in 1943 should have been allowed.
OPINION.
The petitioner corporation herein contends that the Commissioner erred in determining deficiencies in income tax, declared value excess profits tax, and personal holding company surtax for the period January 1, 1943, to August 31, 1943, and claims that it is entitled to the determination of an overpayment of income tax in the amount of $ 18,519.54.
Initially, petitioner challenges the Commissioner's determination that it realized a long term capital gain in the amount of $ 106,534.80 as a result of a transaction whereby 47,000 shares of Transamerica stock were sold to the Transamerica Corporation on July 21, 1943.
The respondent rests his determination upon the principle established in Commissioner v. Court Holding Co., 324 U.S. 331">324 U.S. 331, arguing that the sale of Transamerica stock, although nominally made by the petitioner's stockholders, was in fact and substance actually made by the petitioner through the agency of its stockholders. In the Court Holding Co. case, *213 the Supreme Court recognized that the question of whether a sale is to be regarded as having been made by a corporation or by its stockholders is a question of fact, to be determined in the light of all the attendant facts and circumstances. In respect to the construction of a doubtful transaction, the Court stated:
* * * The incidence of taxation depends upon the substance of a transaction. The tax consequences which arise from gains from a sale of property are not finally to be determined solely by the means employed to transfer legal title. Rather, the transaction must be viewed as a whole, and each step, from the commencement of negotiations to the consummation of the sale, is relevant. A sale by one person cannot be transformed for tax purposes into a sale by *958 another by using the latter as a conduit through which to pass title. To permit the true nature of a transaction to be disguised by mere formalisms, which exist solely to alter tax liabilities, would seriously impair the effective administration of the tax policies of Congress.
The salient facts relating to the sale in controversy may be outlined as follows: In the spring of 1943 the dissolution of the petitioner*214 corporation was first discussed by its president and board of directors because of its unfavorable financial position at that time. Thereafter, a study was initiated to determine the best procedure for accomplishing its dissolution. During the course of this investigation, petitioner's president was advised by tax counsel that the best way for petitioner to handle matters would be to distribute its Transamerica stock in liquidation subject to the lien on it, as by this method the tax consequences would be less and there would remain some equity in the general assets for its stockholders. Therefore, the plan was proposed and subsequently executed whereby the Transamerica stock was distributed in kind to petitioner's stockholders incident to dissolution. The stock was thereafter sold by the stockholders to Transamerica, and the proceeds of the sale were applied in satisfaction of notes which had been secured by the pledge of the stock. In spite of the fact that the sale was made by petitioner's stockholders to Transamerica, the respondent contends that in substance the sale was actually made by the petitioner, and the stockholders were a mere conduit to carry out the sale.
In support*215 of his contention that petitioner must be regarded as the actual seller, respondent states that the transaction was born of a preconceived plan for the avoidance of taxes, hastily executed, and devoid of a business purpose. It is argued by the respondent that no one except the petitioner received any benefit from the transaction, inasmuch as the stock was, at the time of its purported distribution, pledged with and in the possession of petitioner's creditors; the obligations owing to such creditors were in excess of the fair market value of the stock; and petitioner on the date of the sale reduced its indebtedness to the Bank of America so that the total amount owed by it to both the Bank of America and Transamerica exactly equaled the amount paid by Transamerica for the stock. Therefore, respondent concludes that it was never intended that the stockholders should receive either the stock or the proceeds of its sale, but, on the contrary, that they were intended to act simply as a conduit or agency through which the petitioner would effect the sale. We shall first direct our attention to the objections raised by respondent.
To our knowledge, the courts have never questioned the*216 right of a taxpayer to select a course of action designed to minimize or to avoid altogether the imposition of tax where it is shown that the transaction as executed was in reality what it purported to be in form. As was *959 stated by the Supreme Court in United States v. Cumberland Public Service Co., 338 U.S. 451">338 U.S. 451:
Here the Court of Claims has found, on proper supporting evidence, that the sale in question was made by the stockholders rather than the corporation. * * * The subsidiary finding that a major motive of the shareholders was to reduce taxes does not bar this conclusion. Whatever the motive and however relevant it may be in determining whether the transaction was real or a sham, sales of physical properties by shareholders following a genuine liquidation distribution cannot be attributed to the corporation for tax purposes.
Furthermore, it appears that the financial difficulties from which the petitioner was suffering early in 1943 constituted ample justification for the petitioner's decision in favor of dissolution. Once this choice had been genuinely made, the petitioner clearly had the right to select the method of winding*217 up its affairs which would offer it the maximum tax benefit. Acampo Winery & Distilleries, Inc., 7 T. C. 629; Steubenville Bridge Co., 11 T. C. 789. It is clear that, had petitioner sold the stock, the resulting tax on the capital gains would have served to reduce its assets on liquidation to a point where it would have been unable to discharge all of its outstanding obligations.
Although it is true that the stockholders never received actual physical possession of the shares of stock, they did receive a bill of sale which just as effectively transferred title to the stock to them. We are not inclined to accept respondent's conclusion that in these circumstances no one other than the petitioner received any economic benefit from the transaction. The fact that petitioner's stockholders never received actual physical possession of the shares of stock is explained by the fact that the shares were in the possession of two of petitioner's creditors, one of which creditors subsequently became the purchaser. Nor do we think that it was necessary for the stockholders to secure the release of the stock from the creditors, sell*218 it to Transamerica, receive the proceeds therefrom and thereafter, as the transferees of petitioner's assets, channel such funds through the corporation to the creditors in discharge of their claims. In substance, what the stockholders did was to sell the stock to Transamerica and direct that the proceeds be applied directly to the obligations of the petitioner to Transamerica and the Bank of America for which the stockholders as transferees were liable. The ultimate economic benefit derived by the stockholders was that they were able to discharge the corporate indebtedness in full and at the same time protect in some small degree their equity in the corporate assets.
On the other hand, there is a striking absence in the instant case of those familiar facts and circumstances which the courts have consistently regarded as evidence that a corporation, rather than the shareholders, is the moving party in the sale of assets purportedly distributed in liquidation. There is no evidence that petitioner at any *960 time prior to dissolution entered into any negotiations for the purpose of disposing of the Transamerica stock itself. Cf. Acampo Winery & Distilleries, Inc., supra;*219 J. T. S. Brown's Son Co., 10 T. C. 840. On the contrary, all of the evidence shows that, from the time it made the decision to liquidate, petitioner understood that such stock would ultimately be distributed in kind to its stockholders upon dissolution. Cf. United States v. Cumberland Public Service Co., supra.No negotiations with any prospective purchaser for the sale of the stock were initiated by the stockholders until after liquidation was commenced. The petitioner participated in no manner in the negotiations between its stockholders and Transamerica prior to the sale, in the actual sale itself, or in the subsequent disposition of the proceeds. Cf. Rose Kaufmann, 11 T. C. 483; affd., Kaufmann v. Commissioner, 175 Fed. (2d) 28; Wichita Terminal Elevator Co. v. Commissioner, 162 Fed. (2d) 513; Commissioner v. Court Holding Co., supra.Moreover, it is clear that none of the stockholders who were active in the handling of the transaction from start to finish purported to represent*220 the petitioner in any respect.
Therefore, it is our conclusion, based upon a careful consideration of all the material facts and circumstances, that the sale of 47,000 shares of Transamerica stock was made by the petitioner's stockholders to the Transamerica Corporation and that the respondent erred in his determination that the sale in reality was made by the petitioner and the petitioner was, therefore, subject to tax on the gain realized from the sale.
The second question for our determination is whether petitioner was entitled to a deduction of $ 43,577.50 which it claimed on its 1943 contends that it is entitled to the deduction either as a capital loss return as a result of compromising the Stewart notes. The petitioner under section 117, as a bad debt deduction under section 23 (k), or as a business loss under section 23 (f) of the Internal Revenue Code.
It appears that the petitioner had secured by purchase two notes executed by J. L. Stewart, of which the larger was secured by a second deed of trust on the Crest View Apartments and the smaller was secured by a second deed of trust on property known as the Crest View Garage. Having determined to dissolve the corporation, *221 petitioner's directors agreed that it was necessary to realize cash quickly on the two Stewart notes in order to meet its debts and to make liquid funds with which to make distribution to its stockholders. To that end in July, 1943, petitioner offered to sell both Stewart notes to Transamerica at a reasonable discount. In a reply, Transamerica stated that it would not consider purchasing the notes for more than 50 cents on the dollar of the principal amounts and it based its attitude on the fact that an appraisal made by the Bank of America some nine months earlier had set the value of the Crest View Apartments*961 at $ 300,000 and the value of the garage at $ 20,000. Petitioner also offered the notes to the Bank of America, but the latter was not interested in their purchase. It expressed the same view as to the value of the properties as had Transamerica. On July 20, 1943, petitioner's board of directors authorized an officer of the company to negotiate with J. L. Stewart for settlement of the notes. The net result of the negotiations which ensued and which were carried on at arm's length was the settlement of the indebtedness at the figure set forth in our findings, *222 which resulted in the petitioner receiving in settlement of the notes a sum resulting in the loss of $ 43,577.50 which the petitioner in this proceeding seeks to secure as a deduction.
If petitioner had sold the notes to a third person with the resulting loss that it has here suffered, there would seem to be no question that that loss would have been one recognized as a capital loss under section 117 of the Internal Revenue Code. But it is now too well settled to require extended discussion that the compromise of an indebtedness, whether it be based on inability to collect or by reason of anticipating the payment of the indebtedness, is not a sale or exchange within the meaning of the statute and, therefore, is not a transaction that falls under section 117. Hale v. Helvering, 85 Fed. (2d) 819; Stoddard v. United States, 49 Fed. Supp. 641.
There remains the question of whether the loss suffered by petitioner is deductible either as a bad debt under section 23 (k) or a business loss under section 23 (f) of the Internal Revenue Code.
A number of years ago the Supreme Court decided, in Spring City Foundry Co. v. Commissioner, 292 U.S. 182">292 U.S. 182,*223 that the section of the law which deals with the deduction of losses and the section which deals with the deduction of bad debts are mutually exclusive and that an amount properly deductible under one section may not be deducted under the other. The instant case does not, in our opinion, present that question. The obligations which were compromised by the petitioner had not matured at the time of settlement and the compromise did not stem from any determination of probable worthlessness, but arose as a necessary incident of petitioner's liquidation. Testimony was offered by both parties bearing on the value of the security behind the notes, but we do not think decision is to be rested on a determination of value. The compromise of the indebtedness herein served completely to extinguish all obligations between the petitioner and Stewart, thus leaving no uncollectible debt outstanding which might be regarded as being worthless. Thus, unlike the situation presented in the Spring City Foundry Co. case, supra, the petitioner's right to a deduction arising out of the compromise agreement was from the very outset beyond the province of and unrestricted by the provisions relating*224 to the deductibility of bad debts.
There is no disagreement between the parties that petitioner sustained *962 an out-of-pocket loss in the amount of $ 43,577.50 as a result of Stewart anticipating the due date of his indebtedness. The income tax is levied on a taxpayer's net income and, to determine such net income, all genuine losses actually sustained by the taxpayer during the taxable year in connection with regular business transactions or transactions entered into for profit are generally allowable. The treatment of such losses over the years has been varied under the revenue law, depending upon the nature and character of the transaction out of which the loss arose, the period of time during which the assets involved were held by the taxpayer, and the relationship between the parties to the transaction. If the notes in the instant case had been sold within six months of their acquisition to a third party, the loss suffered would have been deductible to its full extent.
By the same token, it is our opinion petitioner has suffered a bona fide loss in the amount of $ 43,577.50 in its transaction with Stewart. As we have pointed out, the dealings were at arm's length and*225 genuine. We know of no case or provision of the statutes, or any reason which would preclude deduction of the loss in determining petitioner's taxable net income. We therefore hold that the petitioner is entitled under section 23 (f) to the benefit of a deduction in the amount of $ 43,577.50 representing a business loss incurred during the taxable period in question.
As a result of our determination that the petitioner is not taxable on the gain realized from the sale of the 47,000 shares of Transamerica stock and is entitled to a deduction for a business loss in the amount of $ 43,577.50, it becomes unnecessary for us to deal with the various other alternative issues raised by the pleadings.
Decisions will be entered under Rule 50.
Hill, J., dissenting: In disposing of the first issue the majority found as a fact that the sale of the 47,000 shares of Transamerica stock on July 21, 1943, was made by the stockholders of West Coast. Such an ultimate finding must inevitably rest on the fact that there was a genuine liquidation distribution by petitioner to its shareholders. See United States v. Cumberland Public Service Co., 338 U.S. 451">338 U.S. 451;*226 Howell Turpentine Co. v. Commissioner, 162 Fed. (2d) 319; and United States v. Cummins Distilleries Corporation, 166 Fed. (2d) 17, 22. Also inherent in such an ultimate finding is the fact that the shareholders acted on their own responsibility and for their own account in negotiating the sale of the 47,000 shares of Transamerica stock. See Howell Turpentine Co. v. Commissioner, supra; United States v. Cummins Distilleries Corporation, supra, and Amos L. Beatty & Co., 14 T.C. 52">14 T. C. 52. I am convinced that neither of these two *963 essential prerequisites to the ultimate finding of the majority was present.
Turning first to the distribution of the Transamerica stock, it is all too clear that petitioner's shareholders received absolutely nothing of value therefrom, for the simple reason that West Coast had no distributable equity in these assets. On July 20, 1943, principal amounts of $ 54,300 and $ 147,481.25 were owing on the two notes held by Bank of America and principal amounts of $ 314,621.69 and $ 33,175 were *227 owing on the two notes held by Transamerica. Thus, on that date the 47,000 shares of stock were pledged for indebtednesses totaling $ 549,577.94, though their market value was only $ 417,125. Therefore, the purported transfer achieved no business purpose whatsoever for the stockholders of West Coast acquired no equity in the property distributed to them. This was no genuine liquidation distribution, but a hollow formalism transacted solely to pass bare legal title to these assets to petitioner's shareholders. In substance and reality West Coast remained the actual owner of the stock at the time of its sale. Gregory v. Helvering, 293 U.S. 465">293 U.S. 465.
It is equally clear that in entering into a contract for sale of the Transamerica stock, the stockholders of West Coast were not dealing for themselves independently, nor was it ever intended that they should do so. The detailed schedule for distribution of the Transamerica stock to petitioner's shareholders, its sale by them and application of the proceeds thereof to the notes held by Bank of America and Transamerica planned by the president of West Coast and a tax attorney prior to the commencement of*228 dissolution proceedings, reveals the subordinate role in this transaction assigned to the stockholders. Furthermore, I find significance in the breathless speed with which commencement of the dissolution proceedings of West Coast, distribution of the Transamerica stock to its shareholders, negotiations for its sale, and, finally, the sale itself and the application of the proceeds to petitioner's indebtedness were accomplished. These circumstances dispel any notion that the sale was consummated by petitioner's shareholders independently and highlight the perfunctoriness of their role as conduits of title executing a plan conceived and controlled by West Coast. See Wichita Terminal Elevator Co. v. Commissioner, 162 Fed. (2d) 313. Nor did petitioner confine its own activity to distribution of the 47,000 shares of Transamerica. Petitioner displayed the true purpose lurking behind the facade of formalisms it had so scrupulously erected by stepping back into the transaction on the day of the sale to reduce the balance owing on its notes for which the Transamerica stock was pledged to the exact sale price of the stock. I can not regard it as a mere*229 coincidence that the vendee of the Transamerica stock was one of its two pledgees, and that the secretary of West Coast arranged the terms of sale with Transamerica. In Rose Kaufmann, *964 11 T.C. 483">11 T. C. 483, this Court laid great stress upon the fact that negotiations for the sale were carried on by an officer of the corporation, whose fiduciary duties placed him in the role of agent for his employer rather than as representative of the stockholders.
But an even surer guidepost towards the conclusion that the shareholders of Transamerica were not acting on their own responsibility and for their own account in selling the Transamerica stock is the total lack of benefit which resulted to them therefrom. West Coast received the entire proceeds of the sale of the stock by having them applied in toto toward the payment of its obligations. The shareholders received no part of the proceeds of the sale. The indebtedness of West Coast to the Bank of America and Transamerica was in no sense the liability of its shareholders. It is hornbook law that where, as here, transferees of pledged property take subject to indebtednesses, they are not personally *230 liable for those obligations. In the light of reality, I can only regard the successive steps taken in the distribution and sale of the Transamerica stock as integral parts of a unified operation by West Coast having as its sole goal payment of certain of its debts by sale of corporate assets without the tax consequences inherent in such action.
I do not understand the rationale of Commissioner v. Court Holding Co., 324 U.S. 331">324 U.S. 331, to be that where negotiations for the sale of corporate assets commence after bare legal title thereto has passed to its shareholders, the subsequent sale must necessarily be attributed to the shareholders. On the contrary, that case emphasizes that determination of the tax consequences of such a sale depends on the substance of the transaction viewed as a whole, rather than on any one aspect thereof. Under the circumstances present in the instant proceedings the finding of the majority that the shareholders of West Coast made the sale exalts artifice above reality and, in the language of the Court Holding Co. case, permits "the true nature of a transaction to be disguised by mere formalisms, which exist solely to *231 alter tax liabilities." Cf. Jones v. Grinnell, 179 Fed. (2d) 873, which stated that the distribution as a liquidating dividend and the subsequent sale to the third person must be a bona fide reality in substance, as distinguished from the stockholders merely constituting a conduit through which to channel title from the corporation to the ultimate purchaser.
In the instant case there was in fact no distribution of the Transamerica stock to petitioner's stockholders, as will appear from the following summarized statements of unquestioned facts:
(1) The stock was pledged by petitioner for the payment of its debts beyond the value of the stock.
(2) The formality of the distribution to the stockholders was coupled with the binding condition that the stock be immediately sold *965 and the proceeds applied in toto toward the payment of petitioner's debts.
(3) Petitioner received the entire proceeds of the sale of the stock by having same applied in toto to the payment of its debts.
(4) The stockholders received no equity in the stock by the so-called distribution and received none of the proceeds of the sale thereof. And
(5) Nothing of value*232 passed or was intended to pass to the stockholders by such purported distribution.
The majority also have held that petitioner was entitled under section 23 (f) of the code to deduct $ 43,577.50 as a business loss it claimed in 1943 as the result of compromising the Crest View Apartments note with Stewart. I can not agree. Since petitioner claims no deduction in reference to the Crest View garage note, no consideration of that note is necessary. At the time of the compromise agreement, Stewart was not in default in the payment of either principal or interest on the Crest View Apartments note. There is nothing in the evidence to show that West Coast or its shareholders, had the note been distributed to them in kind, would not have received the full value of the note at maturity. The only cause for the compromise settlement with Stewart was petitioner's determination to dissolve and the consequent necessity of quickly converting its assets into cash. The agreement of August 6, 1943, was simply a voluntary arrangement whereby a creditor, in return for prepayment of a considerable portion of an indebtedness, agreed to release a solvent debtor from further liability on the unmatured*233 obligation. In my view petitioner has failed to show it sustained any recognizable loss as a result of this transaction.
For the aforementioned reasons, I therefore respectfully dissent.
Footnotes
*. Proceedings of the following petitioners are consolidated herewith: Dorothy Stewart, Transferee; Marie McDonough, Transferee; W. E. Clayton, Jr., Transferee; Irene Kinner, Transferee; Mary C. Smith, Transferee; Dan S. Hewitt, Transferee; W. A. Rabbett, Transferee; L. E. Heller, Transferee; C. L. Braskamp, Transferee.↩