1943 U.S. Tax Ct. LEXIS 234">*234 Decisions will be entered for petitioners in Docket Nos. 104679, 104680, 104681, 104684, and 104685. Decisions will be entered under Rule 50 in Docket Nos. 104682 and 104683.
Where during the taxable year 1935 the evidentiary facts clearly show a sale by some of the second preference stockholders of a corporation to an outside third party to be a bona fide, unrestricted sale, with no strings or commitments attached, and on the same day the outside third party sold the same stock at a slightly increased price, making a profit thereon, to the corporation that had originally issued the stock, held, each sale must be recognized as a separate, independent, and completed transaction for tax purposes; held, further, the gain recognized on the first transaction is to be taken into account in computing net income at the percentages mentioned in section 117 (a) of the Revenue Act of 1934 rather than at 100 percent as provided for distributions in partial liquidation under section 115 (c) of the same act.
1943 U.S. Tax Ct. LEXIS 234">*235 1 T.C. 611">*611 These consolidated proceedings are for the redetermination of deficiencies in income tax determined by the respondent against petitioners for the calendar year 1935 in amounts as follows:
| Petitioner | Docket No. | Deficiency |
| Clara M. Tully Trust | 104679 | $ 63,831.14 |
| Annie B. Houghton Trust | 104680 | 64,202.10 |
| Adelaide L. W. Houghton Trust | 104681 | 23,031.93 |
| Alanson B. Houghton Estate | 104682 | 74,993.97 |
| Arthur A Houghton, Jr | 104683 | 6,056.27 |
| Gratia H. Rinehart Trust | 104684 | 3,577.75 |
| Mabel H. Houghton Trust | 104685 | 3,633.85 |
1 T.C. 611">*612 The entire deficiencies are in controversy, except in Docket No. 104682 the amount in controversy is $ 74,970.03 and in Docket No. 104683 Arthur A. Houghton, Jr., alleges that instead of a deficiency he is entitled to an overpayment of $ 3,181.62.
By appropriate assignments of error there is but one question common to all the petitioners, namely, whether upon the disposition in 1935 by petitioners of a total of 10,000 shares of Corning Glass Works second preference stock, 100 percent of the gains recognized upon such disposition should be taken into account in computing net income under section 115 (c) of the Revenue Act of 1934 as "amounts1943 U.S. Tax Ct. LEXIS 234">*236 distributed in partial liquidation" of a corporation as determined by the respondent, or whether the percentages mentioned in section 117 (a) of the Revenue Act of 1934 of such gains should be taken into account in computing net income, as petitioners all contend. The parties are in agreement as to the amount of gain each petitioner realized and the length of time each petitioner held the shares in question.
In Docket No. 104682 the respondent also made a minor adjustment relative to taxes paid to Great Britain, which adjustment is not contested. This minor adjustment accounts for the above statement that only $ 74,970.03 of the deficiency is in controversy.
In Docket No. 104683, the respondent in determining the amount of the gain used as a basis $ 72.48533 for each share of stock disposed of by Arthur A. Houghton, Jr. This was assigned as error, the petitioner alleging that the basis of his 1,000 shares of second preference stock was $ 100 per share instead of $ 72.48533 per share. At the hearing counsel for the respondent conceded this assignment of error and effect thereto will be given under Rule 50. In this latter proceeding of Arthur A. Houghton, Jr., the respondent also1943 U.S. Tax Ct. LEXIS 234">*237 made a minor adjustment relative to dividends not reported, which adjustment is not contested.
FINDINGS OF FACT.
Petitioners are the present trustees of five trusts, the executors of an estate, and an individual, and their names, together with the names of the trusts and the estate, are as set forth in the caption. The returns of petitioners for the calendar year 1935 were filed with the collector of internal revenue for the 28th District of New York at Buffalo.
On December 21, 1935, Alanson B. Houghton, Arthur A. Houghton, Jr., and the five trusts named in the caption (herein sometimes collectively referred to as the petitioners) were second preference stockholders of the Corning Glass Works, a corporation incorporated under the laws of the State of New York. On that date the directors of the corporation held a meeting and adopted a resolution as follows:
1 T.C. 611">*613 Upon motion made by Mr. Amory Houghton, seconded by Mr. John L. Thomas, and unanimously carried, it was Resolved, That The President and Treasurer be authorized and directed to buy this year, if possible, 10,000 shares of second preference stock of the corporation at 101 or less.
At that time, December 21, 1935, the 1943 U.S. Tax Ct. LEXIS 234">*238 Corning Glass Works had outstanding 55,385 shares of second preference stock which was closely held. A large block of this stock, about 25 percent, was held by the City Bank Farmers Trust Co. of New York as trustee, and petitioners owned over 10,000 shares. Alanson B. Houghton, his son Amory Houghton, and his nephew Arthur A. Houghton, Jr., were the persons who controlled either in their individual capacities or as trustees the stock held by petitioners.
On December 27, 1935, the Guaranty Trust Co. of New York received for the attention of "Parker, Vice Pres." from John L. Thomas, the then secretary and treasurer of the Corning Glass Works, a telegram the body of which was as follows:
Corning Glass Works desires to buy ten thousand shares of its own second preference stock at one hundred one or better this year stop am building up account with you for that purpose and intend to refer sellers to you stop please accept all such stock offered within price limit and charge Corning Glass Works account.
On the same day Thomas wrote the Guaranty Trust Co. of New York a letter confirming the telegram.
Thereafter on the same day, December 27, 1935, Parker called John Wesley Hanes, the senior1943 U.S. Tax Ct. LEXIS 234">*239 partner of Chas. D. Barney & Co., on the telephone and told him that the Guaranty Trust Co. wanted to buy 10,000 shares of second preference stock of Corning Glass Works and were willing to pay 101 for the stock. The business of Chas. D. Barney & Co. was the purchase and sale of securities both for its own account and for the account of its customers. Parker also told Hanes that the City Bank Farmers Trust Co. held that much stock and that he thought they might have some of it for sale. Thereafter, on December 27, 1935, Hanes, acting for Chas D. Barney & Co., wrote a letter to the City Bank Farmers Trust Co. the body of which is as follows:
We are interested in purchasing for our account up to ten thousand shares of Second Preference Stock of the Corning Glass Works and are prepared to pay one hundred and one-half per share for all or any part thereof.
You may consider this a firm bid to that effect.
Chas. D. Barney & Co. did not purchase any of the stock in question. in these proceedings from the City Bank Farmers Trust Co.
Hanes, after writing the above mentioned letter, turned the entire matter over to his partner, Fred Coechlein, who was then acting cashier for Chas. D. Barney1943 U.S. Tax Ct. LEXIS 234">*240 & Co. Hanes told Coechlein to purchase 10,000 shares of second preference stock of Corning Glass Works at the best 1 T.C. 611">*614 price possible but not more than at par and one-half, and when he had bought it to sell the stock so purchased to the Guaranty Trust Co., which wanted to buy it at 101. These instructions were carried out as hereinafter related.
The three above named Houghtons who controlled the stock held by the petitioners would have been willing to sell 10,000 shares of the second preference stock held by petitioners directly to the Corning Glass Works had they not sought counsel as to the possible tax impact of such a move. Upon advice of counsel they decided that they would not sell the stock directly to the Corning Glass Works, but that they would sell it to an outside third party for cash at 100 1/2, without restriction of any kind. It was then understood among these three Houghtons that Arthur would execute the decision.
In executing the decision Arthur's first step was to get the 10,000 shares to be sold into certificates that could be readily transferred, since petitioners each held in a single certificate more shares than each petitioner, respectively, was to 1943 U.S. Tax Ct. LEXIS 234">*241 sell. For instance, the Clara M. Tully trust held certificate No. 2 for 7,020 shares. It wanted to sell and did sell only 2,000 shares. It, therefore, turned its certificate No. 2 for 7,020 shares in to the office of the treasurer of the Corning Glass Works and received two new certificates -- one certificate, No. 65, for 2,000 shares in the name of Thomas & Co., a nominee for the First National Bank, and one certificate, No. 74, for 5,020 shares in the name of the trustees for the Clara M. Tully trust. Similar exchanges were made in the case of each of the other petitioners, with the result that the 10,000 shares to be sold were represented by certificates as follows:
| Certificate | |||
| No. | Shares | Made out in name of -- | For the actual owner |
| 65 | 2,000 | Thomas & Co | Clara M. Tully trust. |
| 66 | 2,000 | Thomas & Co | Annie B. Houghton trust. |
| 72 | 1,000 | Thomas & Co | Adelaide L. W Houghton trust. |
| 69 | 2,000 | Thomas & Co | Alanson B. Houghton. |
| 73 | 1,000 | Thomas & Co | Arthur A. Houghton, Jr. |
| 71 | 1,000 | Thomas & Co | Gratia H. Rinehart trust. |
| 70 | 1,000 | Thomas & Co | Mabel H. Houghton trust. |
On December 30 1935, Thomas, at the direction of Arthur A. Houghton, Jr., took the new certificates for 10,0001943 U.S. Tax Ct. LEXIS 234">*242 shares to New York and on the following day delivered them to the First National Bank of New York. The latter had no business connection with the City Bank Farmers Trust Co. They were competitive banks. Arthur remained at Corning. On December 31, 1935, William Flannery, one of the attorneys for the petitioners, talked with Arthur over the telephone and told him that Chas. D. Barney & Co. was in the market for 10,000 shares of second preference stock of Corning Glass Works and was willing to pay 100 1/2 for the stock. Arthur conveyed this information to Amory Houghton and Alanson B. Houghton, and with their approval 1 T.C. 611">*615 he called Alexander C. Nagle, a vice president of the First National Bank of New York, on the telephone and told Nagle to sell and deliver the 10,000 shares to Chas. D. Barney & Co. at a cash price of $ 100.50 per share, and to deposit the proceeds to the accounts of the several above mentioned stockholders whose stock was being sold. These instructions were fully executed. Chas. D. Barney & Co. purchased the 10,000 shares of second preference stock, for its own account, without any restrictions or commitments of any kind, and, after deducting $ 900 from1943 U.S. Tax Ct. LEXIS 234">*243 the purchase price to pay for Federal and State stock transfer stamps upon the sale, it issued its certified check payable to the order of the First National Bank for the amount of $ 1,004,100. The check was cleared through the New York Clearing House and the First National Bank received payment thereof on the afternoon of December 31, 1935.
On December 31, 1935, the First National Bank addressed a letter to each of the stockholders whose stock it had sold to Chas. D. Barney & Co., advising them that "Under instructions of Mr. Arthur A. Houghton, Jr., we credit your account" with a certain stated amount as representing the proceeds from the sale of a stated number of shares of "Corning Glass Works Second Preference stock." The number of shares sold and the amounts so credited were as follows:
| Proceeds | ||
| Stockholder | Shares sold | credited |
| Clara M. Tully trust | 2,000 | $ 200,820 |
| Annie B. Houghton trust | 2,000 | 200,820 |
| Adelaide L. W Houghton trust | 1,000 | 100,410 |
| Alanson B. Houghton | 2,000 | 200,820 |
| Arthur A Houghton, Jr | 1,000 | 100,410 |
| Gratia H. Rinehart trust | 1,000 | 100,410 |
| Mabel H. Houghton trust | 1,000 | 100,410 |
The stockholders' "basis" for determining gain or loss on1943 U.S. Tax Ct. LEXIS 234">*244 the shares of Corning Glass Works second preference stock sold and the number of years such shares were "held," as that term is used in section 117 of the Revenue Act of 1934, are as follows:
| Shares | Basis per | ||
| Stockholder | sold | share | Years held |
| Clara M. Tully trust | 2,000 | $ 11.8876 | More than 10. |
| Annie B. Houghton trust | 2,000 | 11.8876 | More than 10. |
| Adelaide L. W Houghton trust | 1,000 | 11.8876 | More than 10. |
| Alanson B. Houghton | 2,000 | 11.8876 | More than 10. |
| Arthur A. Houghton, Jr | 1,000 | 100.00 | More than 2 but not more |
| than 5. | |||
| Gratia H. Rinehart trust | 1,000 | 72.48533 | More than 5 but not more |
| than 10. | |||
| Mabel H. Houghton trust | 1,000 | 72.48533 | More than 5 but not more |
| than 10. |
Later on the same day, December 31, 1935, Chas. D. Barney & Co. sold and delivered for its own account the said 10,000 shares of second preference stock at $ 101 per share to the Guaranty Trust Co. of New 1 T.C. 611">*616 York and affixed to the bill of sale from Chas. D. Barney & Co. the proper amount of Federal and New York stock transfer stamps upon the sale, namely, $ 900, thus making a profit for Chas. D. Barney & Co. of $ 4,100 on the purchase and sale of that stock. It 1943 U.S. Tax Ct. LEXIS 234">*245 so recorded the purchase and sale for its own account in its books of account in its own "Bond & Stock Account" and on the receipt side and delivery side, respectively, of its "blotter record."
The Guaranty Trust Co. of New York purchased the stock for the account of the Corning Glass Works and charged the cost thereof, $ 1,010,000, to the Corning Glass Works' deposit account on its books. This purchase was made pursuant to the directions given by Thomas in the above telegram of December 27, 1935.
The corporate purpose of the purchase by the Corning Glass Works was to reduce the surplus cash position of the company to the needs of the operation of the business.
Prior to December 16, 1929, the authorized number of shares of capital stock of the Corning Glass Works consisted of 78,400 shares of preferred with a par value of $ 100 each and 160,000 shares of common without par value. On December 16, 1929, the company filed with the Department of State of the State of New York a certificate of amendment of certificate of incorporation, wherein henceforth its authorized number of shares of capital stock was to consist of 8,400 shares of first preferred with a par value of $ 100 each, 70,0001943 U.S. Tax Ct. LEXIS 234">*246 shares of second preference without par value, and 160,000 shares of common without par value. The second preference stock was entitled to a quarterly cumulative dividend at the rate of $ 6 per share per annum, payable on the first days of March, June, September, and December in each year, but only from undivided net profits or surplus of the company remaining after providing for the payment of the full dividends for such year on the first preferred stock. Paragraph 9D of the certificate of amendment is in part as follows:
D. By a vote of the Board of Directors all or any part of the First Preferred stock or of the Second Preference stock at any time outstanding may be called for purchase by the corporation in the manner hereinafter provided on any dividend day at $ 100 a share, together with the dividends accrued on the dividend day for which the call is made and all accumulated dividends if any. In case less than all the outstanding stock of the same class is not called, it shall be accomplished in any legal manner then determined by the Board of Directors. * * * After such notice and deposit all stock so called shall be deemed to have been redeemed and the holders of the certificates1943 U.S. Tax Ct. LEXIS 234">*247 therefor shall cease to have any rights to future dividends or other rights or privileges as stockholders in respect of such stock and shall be entitled in respect of such stock only to the payment of the sums so deposited with said Trust Company for their respective accounts. Stock so redeemed may be reissued but only subject to the limitations imposed by these provisions upon the issue and reissue of the class of stock redeemed.
1 T.C. 611">*617 On December 27, 1929, the Corning Glass Works issued 57,577 1/2 shares of the 70,000 shares of second preference stock authorized. On January 29, 1930, it acquired 2,160 shares and on the following day it issued 2,160 shares. Thereafter and until December 31, 1935, when it acquired the 10,000 shares in question, it had acquired at eight different times a total of 2 192 1/2 shares, but during this period it did not reissue any of the shares so acquired. After the seven certificates evidencing 10,000 shares were acquired by the company, no new certificates were issued in their place. No new certificates were ever issued in the place of certificates evidencing second preference shares that were acquired by the company. During 1936 the company1943 U.S. Tax Ct. LEXIS 234">*248 acquired 3,794 shares, thus leaving 41,591 shares outstanding. Late in 1936 the Corning Glass Works and Macbeth-Evans Glass Co. entered into a plan of consolidation, which plan recognized the second preference stock of the Corning Glass Works then outstanding as "aggregating 41,591 shares."
No statutory or other proceeding was taken to reduce the authorized second preference stock. There was no pro rata acquisition of the second preference stock by the Corning Glass Works.
On January 2, 1936, Thomas addressed a letter to the Guaranty Trust Co. of New York, the body of which is as follows:
We have your telegram and confirmation stating that you have charged our account $ 1,010,000 for 10,000 shares of Second Preference Stock. Kindly have this stock shipped by registered mail to me as Treasurer at Corning, New York.
Inasmuch as this stock is to be cancelled, it may save some charges to have the signatures punched out before shipment by you and, if so, it is perfectly satisfactory for you to do this.
We will appreciate receiving the stock at your earliest convenience.
The signatures to the seven certificates evidencing the 10,000 shares were perforated by the Guaranty Trust Co. at1943 U.S. Tax Ct. LEXIS 234">*249 the request of the Corning Glass Works.
The Corning Glass Works charged $ 1,000,000 of the disbursement made for the 10,000 shares to its account captioned "Capital Stock, 6% II Preference Shares, Without Par Value." It charged against "Earned Surplus" the remaining $ 10,000 under an entry dated December 31, 1935, reading, "Prem Cancl 10 M Shs II Pref $ 10,000.00."
The parties have stipulated that on December 31, 1935, the accumulated earnings since March 1, 1913, undistributed in the hands of the Corning Glass Works, were in excess of $ 1,010,000.
The 1935 corporation income and excess profits tax return of the Corning Glass Works, together with the balance sheet thereto attached, designated "Schedule K," shows that on December 31, 1934, the company had outstanding 55,385 shares of second preference stock representing a liability of $ 5,538,500, and that on December 31, 1935, it had outstanding 45,385 shares of this stock, representing a liability of 1 T.C. 611">*618 $ 4,538,500. In schedule L attached to this return appears the entry "Premium on Cancellation 2nd Pfd. Stk. $ 10,000.00."
The Corning Glass Works maintained a treasury stock account for shares it acquired of its common and1943 U.S. Tax Ct. LEXIS 234">*250 first preferred stock, but it did not maintain a treasury stock account for the shares of its second preference stock which it acquired.
At the time of the hearing of these proceedings Alanson B. Houghton, Thomas, and Parker were all deceased.
Arthur A. Houghton, Jr., filed his petition with the United States Board of Tax Appeals (now The Tax Court of the United States) 2 on September 10, 1940. He paid income taxes for the calendar year 1935 on dates and in amounts as follows:
| Mar. 5, 1936 | $ 1,304.32 |
| June 9, 1936 | 1,304.30 |
| Sept. 11, 1936 | 1,304.30 |
| Dec. 8, 1936 | 1,304.30 |
| May 10, 1939 | 3,391.14 |
| Total | 8,608.36 |
The respondent determined that petitioners realized gain on the difference between the proceeds credited to their respective accounts in the total amount of $ 1,004,100 and the basis per share set out above (except in the case of Arthur A. Houghton, Jr., the basis per share determined by the respondent was $ 72.48533) and that they were taxable on 100 percent of 1943 U.S. Tax Ct. LEXIS 234">*251 this gain under section 115 (c) of the Revenue Act of 1934 as representing amounts distributed in partial liquidation of the Corning Glass Works.
The sale of the 10,000 shares of second preference stock of Corning Glass Works by petitioners to Chas. D. Barney & Co. was a bona fide sale to an outside third party, with no restrictions or commitments of any kind for its subsequent resale by Chas. D. Barney & Co. to the Corning Glass Works. The gain resulting therefrom was gain from the sale of capital assets and the percentages of such gain to be taken into account in computing net income are the percentages provided for in section 117 (a) of the Revenue Act of 1934.
OPINION.
The question in these proceedings is whether the stipulated gain here involved is to be taken into account in computing net income at the percentage (100 percent) mentioned in section 115 of the Revenue Act of 1934, as the respondent contends, or at the percentages mentioned in section 117 of the same act, as petitioners contend. 1 T.C. 611">*619 The material provisions of these sections are in the margin. 3 The answer to the question depends upon whether the second preference stockholders of the Corning Glass Works1943 U.S. Tax Ct. LEXIS 234">*252 in substance transferred their stock to the Corning Glass Works in consideration for "amounts distributed in partial liquidation" of that corporation, or whether in any event the disposition by the stockholders of their stock must be regarded as a "sale" of a capital asset.
1943 U.S. Tax Ct. LEXIS 234">*253 Petitioners primarily contend that the stockholders made a bona fide unrestricted sale of their stock to Chas. D. Barney & Co.; that section 115 would have no application because the stockholders received nothing from the Corning Glass Works; that the stockholders' dealings were with Chas. D. Barney & Co. (through their agent, the First National Bank) in a separate and completed transaction; that their entire consideration for the stock disposed of came from Chas. D. Barney & Co. as consideration for the sale of a capital asset; and that section 117 (a) controls as to the percentage of gain to be taken into account. In support of this primary contention petitioners cite John D. McKee et al., Trustees, 35 B. T. A. 239, and Estate of Emanuel Ulman, 46 B. T. A. 517 (on review to the Fifth Circuit).
The respondent contends that the sale to Chas. D. Barney & Co. was an artificial, unessential, transitory phase of a completed tax avoidance scheme which should be disregarded in the determination of the tax liabilities herein, and that in substance the proceedings present a partial liquidation as defined in section 115 (i), 1943 U.S. Tax Ct. LEXIS 234">*254 supra. In support of these contentions the respondent cites Griffiths v. Helvering, 308 U.S. 355">308 U.S. 355; Higgins v. Smith, 308 U.S. 473">308 U.S. 473; Groves v. Commissioner, 99 Fed. (2d) 179; 1 T.C. 611">*620 Electrical Securities Corporation v. Commissioner, 92 Fed. (2d) 593; Ahles Realty Corporation v. Commissioner, 71 Fed. (2d) 150; Shoenberg v. Commissioner, 77 Fed. (2d) 446; Commissioner v. Ashland Oil & Refining Co., 99 Fed. (2d) 588; Helvering v. Bashford, 302 U.S. 454">302 U.S. 454; Helvering v. Alabama Asphaltic Limestone Co., 315 U.S. 179">315 U.S. 179; Morsman v. Commissioner, 90 Fed. (2d) 18; Commissioner v. Dyer, 74 Fed. (2d) 685; Helvering v. F. & R. Lazarus & Co., 308 U.S. 252">308 U.S. 252; Helvering v. Horst, 311 U.S. 112">311 U.S. 112; James D. Robinson, 27 B. T. A. 1018;1943 U.S. Tax Ct. LEXIS 234">*255 affd., 69 Fed. (2d) 972; J. Natwick, 36 B. T. A. 866; and W. & K. Holding Corporation, 38 B. T. A. 830.
As an alternative, petitioners contend that if the sale to Chas. D. Barney & Co. should for any reason be disregarded and the disposition by the stockholders of their second preference stock be regarded in substance as a transfer to the Corning Glass Works, then the transaction must nevertheless be regarded as a sale of capital asset to the Corning Glass Works and still be controlled by section 117 (a) on the alleged ground (disputed by the respondent) that the Corning Glass Works did not cancel or redeem the 10,000 shares in question but as a matter of law held them as treasury stock. In support of this alternative contention petitioners rely upon William A. Smith, 38 B. T. A. 317, and Ernest Alpers, 126 Fed. (2d) 58.
We agree with petitioners' primary contention. It has been said many times by the courts that if a method to minimize taxes is carried out by legal means and is bona fide and not a mere sham, it is not subject to 1943 U.S. Tax Ct. LEXIS 234">*256 censure. United States v. Isham, 17 Wall. (84 U.S.) 496; Bullen v. State of Wisconsin, 240 U.S. 625">240 U.S. 625; Iowa Bridge Co. v. Commissioner, 39 Fed. (2d) 777; John D. McKee et al., Trustees, supra;John Sherwin, 46 B. T. A. 330; and Commissioner v. Gilmore, 130 Fed. (2d) 791. In Gregory v. Helvering, 293 U.S. 465">293 U.S. 465, the Supreme Court in the course of its opinion said:
* * * The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted. United States v. Isham, 17 Wall. 496, 506; Superior Oil Co. v. Mississippi, 280 U.S. 390">280 U.S. 390, 280 U.S. 390">395, 280 U.S. 390">396; Jones v. Helvering, 63 Ohio App. D.C. 204">63 Ohio App. D. C. 204, 71 F. (2d) 214, 217.
The law certainly permitted the stockholders of the Corning Glass Works to sell their 10,000 shares of second preference stock to Chas. D. Barney & Co., 1943 U.S. Tax Ct. LEXIS 234">*257 which they did through their agent, the First National Bank. There was nothing illegal in such a transaction. Where, however, such a sale is made for the known purpose of assuring the sellers of the benefit of the capital gains provisions of section 117 (a), supra, rather than risk the possibility of having 100 percent of the gains taxed as a distribution in partial liquidation under section 115 (c), supra, it is perfectly proper for the taxing authority to scrutinize the transaction closely for the purpose of determining whether 1 T.C. 611">*621 there was a bona fide unrestricted sale in fact, with no commitments of any kind such as a binding side agreement to immediately resell the stock to the issuing corporation at a fixed price. But when this is done and the evidentiary facts clearly show, as they do in the instant proceedings, that the sale is bona fide, that it was unrestricted, that the purchaser is bound by no commitments and is free to do with the property purchased whatever the purchaser desires, then the taxing authority must recognize the transaction for what it is. Cf. Estate of Emanuel Ulman, supra.
The respondent in his brief emphasizes1943 U.S. Tax Ct. LEXIS 234">*258 the evidentiary facts that before Chas. D Barney & Co. purchased the 10,000 shares at 100 1/2 it knew it could resell them to the Guaranty Trust Co. (agent for the Corning Glass Works) at 101; that Hanes, the senior partner of Chas. D. Barney & Co., told Coechlein, another member of the firm of Chas. D. Barney & Co. to purchase the 10,000 shares at not more than 100 1/2 and then to sell the stock to the Guaranty Trust Co. at 101. We do not regard these evidentiary facts as detrimental to petitioners' primary contention. Chas. D. Barney & Co. had not agreed with anyone to resell to the Guaranty Trust Co. It was acting for its own account and after it had purchased the 10,000 shares it was free to do whatever it pleased with them. The fact that it did, on the same day that it purchased them, resell them to the Guaranty Trust Co., acting for the Corning Glass Works, has no bearing on the tax consequences of the sale by the second preference stockholders of the Corning Glass Works. That sale was one separate, independent, and completed transaction and the sale by Chas. D. Barney & Co. to the Guaranty Trust Co. was another wholly separate, independent, and completed transaction, and1943 U.S. Tax Ct. LEXIS 234">*259 each transaction has its own tax consequences. See Gus T. Dodd, 46 B. T. A. 7; affd. 131 Fed. (2d) 382; Estate of Emanuel Ulman, supra; and George C. Woodruff, 46 B. T. A. 727; affd., 131 Fed. (2d) 429, in which the Commissioner took the opposite position as to separate tax consequences from that which he takes here and in which we sustained him.
The respondent's argument in this proceeding seems largely based upon the fact that petitioners could have turned in their 10,000 shares of second preference stock to the Corning Glass Works for cash and thus have been taxed 100 percent on the gains, rather than to have sold the stock to an outside party and be taxed on the percentages of capital gains as provided by law, and that, because they did not do it that way, they should nevertheless be taxed as if they had done it that way. This seems to be in essence the same sort of an argument that the Commissioner used to support his position in Commissioner v. Gilmore, supra. The court in that case took notice1943 U.S. Tax Ct. LEXIS 234">*260 of the argument in the following language:
1 T.C. 611">*622 * * * The result to be reached through this merger, it is said, could have been reached more directly by an out and out liquidation which, of course, would have been taxable under § 115 (c). * * * We think this gets down to the proposition that if there are two ways of accomplishing a legitimate business result, one of which clearly creates a taxable transaction, one is equally subject to tax liability if he chooses the other unless there is an adequate business reason for the particular method used. We do not think this is the rule of the statute, the Regulations, nor, as we read them, the decisions. The cases cited by the appellant do not extend the Gregory doctrine this far. * * *
We agree with petitioners that John D. McKee et al., Trustees, supra, squarely supports their position. The petitioners in that case, on January 31, 1931, as trustees, were and for more than two years had been the owners of bonds which matured on February 1, 1931. They knew that the bonds were to be redeemed at par at maturity. To insure the taxability of the resulting gain under section 101 of the Revenue Act of1943 U.S. Tax Ct. LEXIS 234">*261 1928 (similar to section 117, supra) the petitioners on Saturday, January 31, 1931, sold the bonds at par to an affiliate of the American Trust Co., which as trustee called the entire issue of such bonds for redemption for Monday, February 2, 1931. In that case the Commissioner contended that the gains realized by petitioners should be taxed as ordinary gains; that the petitioners there were not entitled to the benefit of the capital net gain section of the statute because they did not make actual sales in good faith to the affiliate and because the transactions were not normal business transactions even if they were actual sales and made in good faith; and that essentially the transactions were not sales but redemptions. 4 We held that there was no merit in any of those contentions and that petitioners were entitled to have the profits realized on the sales taxed under section 101 (a) of the Revenue Act of 1928. The McKee case was acquiesced in by the Commissioner (Cumulative Bulletin 1937-1, pp 10. 15) and was cited with approval in Frances M. Averill, 37 B. T. A 485, 493; reversed on other issues, 101 Fed. (2d) 644,1943 U.S. Tax Ct. LEXIS 234">*262 and in Isaac W. Frank Trust of 1927, 44 B. T. A. 934, 940 (on review to Third Circuit). In his reply brief the respondent, in criticising the McKee case, says it was decided without the benefit of the subsequent pronouncements of the United States Supreme Court in such cases as Helvering v. F. & R. Lazarus & Co.; Griffiths v. Helvering; Higgins v. Smith; and Helvering v. Horst, all supra. These decisions in our opinion do not impair in the slightest degree the correctness of the principles applied in the McKee case. In the F. & R. Lazarus & Co. case the taxpayer was claiming depreciation on three buildings used in its business. The Commissioner had disallowed the deduction on the ground that in a prior year the taxpayer had conveyed the legal title in the buildings to another. In 32 B. T. A. 633, the Board of Tax Appeals held that the conveyance in the prior 1 T.C. 611">*623 year, while in written form was a transfer of ownership with a lease back, in substance was a loan secured by the property involved. We allowed the deduction and were affirmed by the Sixth Circuit and by the Supreme1943 U.S. Tax Ct. LEXIS 234">*263 Court. The entity that was disregarded in the Griffiths case was a corporation wholly owned by Griffiths. In the instant proceedings neither the petitioners nor the Corning Glass Works had any control of or interest in Chas. D. Barney & Co., the transaction with which the respondent seeks to disregard. In 308 U.S. 473">Higgins v. Smith, supra, a sale to a wholly owned corporation was disregarded on the ground that, although title passed to the corporation, the taxpayer-stockholder "retained the control." In the instant proceedings the sale was to an outsider. Both title and control of the 10,000 shares passed to this outsider with no strings attached. In the Horst case, the Supreme Court held that a gift during the donor's taxable year of interest coupons detached from the bonds, delivered to the donee, and later in the year paid at maturity, was realization of income taxable to the donor. No such question is involved in the instant proceedings.
1943 U.S. Tax Ct. LEXIS 234">*264 Neither do the facts in the remaining cases cited by the respondent even remotely resemble the facts in the instant proceedings. Groves v. Commissioner had to do with the creation of a corporation for the purpose of diverting to it the income of the taxpayer. Electrical Securities Corporation v. Commissioner, Ahles Realty Corporationv. Commissioner, Commissioner v.Ashland Oil & Refining Co., Helvering v. Bashford, and Helvering v.Alabama Asphaltic Limestone Co. are all reorganization cases involving the creation of a temporary corporation formed and used for the sole purpose of avoiding a tax or else the determination of the question whether a reorganization took place. Morsman v. Commissioner had to do with the legal effect of the attempted creation of a trust in which the taxpayer was settlor, sole trustee, and life beneficiary. Commissioner v. Dyer involved the question whether there was on the sale a contract to repurchase the stock sold. In Shoenberg v. Commissioner, a corporation over which the taxpayer had complete domination was held his agent in certain stock transactions.
The three remaining cases cited 1943 U.S. Tax Ct. LEXIS 234">*265 by the respondent, James D. Robinson, J. Natwick, and W. & K. Holding Corporation, are cited in connection with petitioners' alternative contention. Since we agree with petitioners' primary contention, it becomes unnecessary to consider the alternative contention or to make ultimate findings in that regard.
The view we take in these proceedings is that the second preference stockholders here involved sold their 10,000 shares to Chas. D. Barney & Co. in a bona fide, unrestricted sale for a cash consideration of $ 100.50 per share, less $ 900 for Federal and New York revenue stamps. This was a completed transaction, and, since it was a sale of a capital asset, section 117 (a), supra, should be applied for the purpose of determining 1 T.C. 611">*624 the percentage of gain to be taken into account in computing net income. We hold, therefore, that the respondent erred in applying section 115 (c), for the reason that that section has no application to this transaction. John D. McKee, et al., Trustees, supra.Cf. Pauline Ickelheimer, 45 B. T. A. 478; affd., 132 Fed. (2d) 660.
Decisions will1943 U.S. Tax Ct. LEXIS 234">*266 be entered for petitioners in Docket Nos. 104679, 104680, 104681, 104684, and 104685. Decisions will be entered under Rule 50 in Docket Nos. 104682 and 104683.
Footnotes
1. Proceedings of the following petitioners are consolidated herewith: Annie B. Houghton Trust, Amory Houghton as Trustee under the Last Will and Testament of Amory Houghton, Jr., Deceased; Adelaide L. W Houghton Trust, Corning Trust Company and Amory Houghton, as Trustees under Certain Trust Assignments of Alanson B. Houghton made the 7th day of July, 1924, the 31st day of March, 1926, and the 24th day of December, 1927; Alanson B. Houghton Estate, Amory Houghton and Arthur A. Houghton, Jr., as Executors of the last Will and Testament of Alanson B. Houghton, Deceased; Arthur A. Houghton, Jr.; Gratia H. Rinehart Trust, Amory Houghton and Arthur A. Houghton, Jr., as Trustees under the Last Will and Testament of Arthur A. Houghton, Deceased; and Mabel H. Houghton Trust, Amory Houghton and Arthur A. Houghton, Jr., as Trustees under the Last Will and Testament of Arthur A. Houghton, Deceased. Alanson B. Houghton died September 16, 1941. By motion duly made and granted Alanson B. Houghton Estate, Amory Houghton, and Arthur A. Houghton, Jr., as Executors of the Last Will and Testament of Alanson B. Houghton, Deceased, were substituted as petitioners for petitioner Alanson B. Houghton in Docket No. 104682. Also by motions duly made and granted Alanson B. Houghton has been dropped as one of the trustees named in the caption in Docket Nos. 104679, 104680, 104684, and 104685, and Amory Houghton has been substituted for Alanson B. Houghton as one of the trustees named in the caption of Docket No. 104681.↩
2. Sec. 504, Revenue Act of 1942.↩
3. SEC. 115. DISTRIBUTIONS BY CORPORATIONS.
* * * *
(c) Distributions in Liquidation. -- Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined under sectaion 111, but shall be recognized only to the extent provided in section 112. Despite the provisions of section 117 (a), 100 per centum of the gain so recognized shall be taken into account in computing net income. * * *
* * * *
(i) Definition of Partial Liquidation. -- As used in this section the term "amounts distributed in partial liquidation" means a distribution by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock.
SEC. 117. CAPITAL GAINS AND LOSSES.
(a) General Rule. -- In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net income:
100 per centum if the capital asset has been held for not more than 1 year;
80 per centum if the capital asset has been held for more than 1 year but not for more than 2 years;
60 per centum if the capital asset has been held for more than 2 years but not for more than 5 years;
40 per centum if the capital asset has been held for more than 5 years but not for more than 10 years;
30 per centum if the capital asset has been held for more than 10 years.↩
4. At that time gains from redemptions were held to be taxable as ordinary gains and not as capital gains. John H. Watson, Jr., 27 B. T. A. 463↩.