*10 Decision will be entered under Rule 50.
Whether distributions made to petitioner in 1940 were in partial or in complete liquidation of a corporation is a question of fact. In 1930 Corporation B was formed to take over certain assets of Corporation A. Corporation B guaranteed that Corporation A would realize specified sums from the collection of certain accounts receivable, would receive designated profits and fees, and would sustain no loss on other items. Corporation A assigned its contractual rights and also the assets related thereto to Corporation C. In 1934, 1937, and 1939 Corporation C made distributions to its stockholders in partial liquidation. In 1940 the conditions of the guaranty made by Corporation B were fulfilled and immediately thereafter a plan to effect a complete liquidation of Corporation C was adopted and completed. Held, that the distribution made in 1940 to petitioner as a stockholder of Corporation C was in complete liquidation and taxable as a long term capital gain under section 115 (c), Internal Revenue Code.
*1384 The respondent determined a deficiency of $ 30,835.36 in the petitioner's income tax liability for the year 1940.
The sole issue is whether certain distributions made to the petitioner in 1940 by the Harriman Thirty Corporation were distributions in complete liquidation or distributions in partial liquidation of that corporation.
FINDINGS OF FACT.
Certain facts were stipulated. The portions thereof material to the issue are as follows:
The petitioner resides at Old Homestead, Arden, New York. He filed his income tax return for the year 1940 with the collector of internal revenue for the second*12 New York district for the city of New York. He kept his books and filed his income tax return on the cash basis.
On February 4, 1930, the petitioner was a stockholder of W. A. Harriman & Co., hereinafter called Harriman, Inc., and owned 4,801 shares of cumulative preferred stock, 4,801 shares of participating preferred stock, and 2,505 shares of the common stock of that corporation.
At a special meeting of the board of directors of Harriman, Inc., held on January 15, 1930, the chairman advised that a reorganization *1385 of that corporation be effected, and outlined certain proposed changes in the management of the corporation. At an adjourned special meeting of the board of directors of Harriman, Inc., held on January 20, 1930, G. H. Walker resigned as president of the corporation, in accordance with the plan to reorganize the management of the corporation, and W. A. Harriman was elected to succeed him in that office. The plan of reorganization was then presented to the meeting and adopted. The plan provided for the transfer of certain assets of the corporation to a new company, to receive in exchange therefor all the capital stock of the new company and to declare such *13 stock out as a dividend to the stockholders of Harriman, Inc., share for share. The assets consisted of a large number of securities, stock options, and accounts receivable.
Pursuant to the plan of reorganization, Harriman Fifteen Corporation, hereinafter called Harriman Fifteen, was organized under the laws of the State of Delaware on January 22, 1930, with an authorized capital stock of 58,300 shares. On January 31, 1930, the plan of reorganization was carried out by the sale of certain assets of Harriman, Inc., to Harriman Fifteen and by the execution by the two corporations of an agreement bearing the same date.
The agreement provided that Harriman, Inc., would pay to Harriman Fifteen sums in excess of the specified amounts of certain profits and fees and that Harriman Fifteen would pay to Harriman, Inc., any sums received therefrom less than those specified. Harriman Fifteen also agreed to indemnify Harriman, Inc., for any amounts paid by it in connection with an action pending in the Supreme Court, New York County, State of New York, and for any loss to Harriman, Inc., due to its guaranty of loans to the protective committee of the bondholders of the city of Lake Worth, Florida. *14 Harriman Fifteen also guaranteed to Harriman, Inc., the collection of eleven accounts aggregating over $ 540,000. Harriman Fifteen further agreed to purchase from Harriman, Inc., certain securities valued at $ 635,665 and to make no distributions to its stockholders, in cash or in kind, until it had completed such purchase.
As the result of the execution of the plan of reorganization of Harriman, Inc., on or about February 4, 1930, the petitioner received 4,801 shares of the capital stock of Harriman Fifteen in respect to his 4,801 shares of participating preferred stock of Harriman, Inc., and received 2,505 shares of the capital stock of Harriman Fifteen in respect to his 2,505 shares of common capital stock of Harriman, Inc. Thereafter, G. H. Walker was elected president of Harriman Fifteen on February 6, 1930. On May 29, 1930, he resigned as chairman of the executive committee of Harriman, Inc., and thereafter took no active part in that corporation's affairs.
*1386 At a special meeting of the board of directors of Harriman Fifteen, held February 6, 1930, it was resolved that a committee consisting of F. S. Connett, Knight Wooley, and G. C. Thayer be chosen to represent*15 all the stockholders of Harriman Fifteen who deposited their stock with the committee under an agreement dated February 10, 1930. Thereafter, all stock of the corporation was transferred to that committee. G. H. Walker held 17,055 shares of Harriman Fifteen and nine associates held, among them, 6,283 such shares, or a total of 23,338 shares.
The stockholders of Harriman, Inc., duly approved the reorganization and its contract with Harriman Fifteen. On May 29, 1930, the board of directors of Harriman, Inc., accepted G. H. Walker's resignation as a director of that corporation. Thereupon, he offered for sale his stock in Harriman, Inc., the value of which was fixed by the executive committee of that corporation.
At a meeting of the board of directors of Harriman, Inc., held December 31, 1930, it was stated that certain assets of the corporation were to be transferred to Harriman Thirty Corporation, hereinafter called Harriman Thirty, a corporation organized December 29, 1930, under the laws of Delaware, after retirement of the cumulative preferred stock of Harriman, Inc., and it was resolved that the capital stock of Harriman Thirty be paid as a liquidating dividend upon the participating*16 preferred stock and the common stock of Harriman, Inc. The holders of the participating preferred stock and the common stock of Harriman, Inc., on January 6, 1931, received pro rata 1 share of the capital stock of Harriman Thirty for each 25 shares of such participating preferred stock and common stock of Harriman, Inc. The petitioner received 665 24/25 such shares. The certificate of incorporation of Harriman Thirty granted to it the powers usually held by a corporation owning and dealing in securities.
On January 6, 1931, in consideration of 2,087 shares of Harriman Thirty capital stock, Harriman, Inc., transferred to Harriman Thirty certain scheduled assets, including the sellers' rights under its guaranty contract with Harriman Fifteen, but subject to the assumption by Harriman Thirty of liabilities and obligations of Harriman, Inc., as so set forth. Securities of the city of Lake Worth and the city of Wildwood were also included in the schedule.
At a directors' meeting held on May 31, 1934, the chairman of the board of directors of Harriman Thirty stated that he believed it would be appropriate and advisable for the corporation to distribute to its shareholders in partial*17 liquidation of the corporation the major portion of the cash held by the corporation, in full payment in exchange for the pro rata surrender and retirement of shares of capital stock of *1387 the corporation. Thereupon it was resolved that the capital of the corporation be reduced from $ 1,165,728.01 to $ 855,728.01 and that, subject to the approval of the stockholders, the corporation be partially liquidated by reducing its outstanding stock from 2,087 shares to 1,565.25 shares. On December 17, 1935, at a similar meeting of the board of directors of Harriman Thirty, a further distribution in partial liquidation was discussed in some detail, but it was decided to postpone further liquidation for the time being.
At a special meeting of such directors held December 9, 1937, the chairman again stated that he believed it would be appropriate and advisable for the corporation to distribute to its shareholders in partial liquidation of the corporation the major portion of the cash held by the corporation in full payment in exchange for the pro rata surrender and retirement of shares of the capital stock of the corporation. Thereupon, it was resolved that, subject to stockholders' *18 approval, the capital of the corporation be reduced from $ 855,728.01 to $ 505,728.01, and that the corporation be partially liquidated by reducing its outstanding stock from 1,565.25 shares to 939.15 shares.
At a special meeting of the board of directors of Harriman Fifteen held April 7, 1938, a general discussion was held by the directors concerning the open accounts on the Harriman Thirty books, collection of which had been guaranteed by Harriman Fifteen under the agreement of January 31, 1930, with Harriman, Inc. After due consideration, it was the consensus of opinion that no action on any of these accounts be taken at the time.
At a special meeting of the board of directors of Harriman Thirty held December 21, 1939, it was resolved that the capital stock of the corporation be reduced from $ 505,728.01 to $ 400,000, and that, subject to the approval of the stockholders, the corporation be partially liquidated by reducing the outstanding stock from 939.15 to 751.32 shares.
At a special meeting of the board of directors of Harriman Fifteen held May 1, 1940, the chairman advised that there still remained certain guaranteed accounts payable to Harriman Thirty as successor to Harriman, *19 Inc., under the January 31, 1930, agreement. Thereupon, the chairman was authorized to take such action on the accounts as was necessary.
At a special meeting of the board of directors of Harriman Thirty held November 7, 1940, the chairman advised that an agreement was entered into between Harriman Fifteen and Harriman Thirty, wherein it was agreed to settle two of the open accounts on Harriman Thirty's books guaranteed by Harriman Fifteen, namely, the G. G. Moore account and the L. Waterbury account.
*1388 At a special meeting of the board of directors of Harriman Thirty held December 16, 1940, the chairman stated that the corporation was about to receive from Harriman Fifteen the sum of $ 38,584.12 (pursuant to the agreement of November 7, 1940), of which Harriman Thirty would be required to pay an aggregate amount of $ 794.18 to the stockholders of Harriman Fifteen who had not given their unqualified consent to the payment. Thereupon, it was resolved that such sum be accepted in full settlement of the obligation of Harriman Fifteen as guarantor of the G. G. Moore and L. Waterbury accounts. The chairman then stated that the corporation was about to receive from Harriman *20 Fifteen the sum of $ 223,665.05 in full satisfaction of the obligations of Harriman Fifteen on certain other accounts. Thereupon it was resolved to accept that sum in full satisfaction of such other accounts. The chairman then stated that upon completion of the transactions above mentioned the assets of the corporation would consist solely of cash in the amount of $ 461,272.72 and certain minor items. Disposition was then made of the remaining minor items, and the chairman recommended that the board of directors authorize immediate dissolution of the corporation. It was duly resolved to dissolve the corporation and that its assets be distributed in liquidation on December 27, 1940, to the stockholders of record on that date.
The distributions in partial liquidation made in the calendar years 1934, 1937, and 1939, respectively, were treated as distributions in partial liquidation in the Federal income tax returns of the petitioner herein for those years, to which treatment the respondent has made no adjustment and does not propose to make any adjustment. Such distributions were duly approved by the stockholders of Harriman Thirty.
On July 28, 1939, Harriman Thirty made an application*21 to the Commissioner of Internal Revenue under the provisions of section 112 (i) of the Revenue Act of 1938.
The distribution of Harriman Thirty's assets was made in the calendar year 1940, and at the date of such distribution the petitioner was the owner of 242.6256 shares of the stock of Harriman Thirty, for which he paid $ 180,813.10. The dates of acquisition of such shares of stock, the amount received in respect thereto on such distribution in 1940, the cost basis thereof, and the gain or loss realized by the petitioner on such shares of stock as a result of the 1940 distribution appear in a detailed schedule, reference to which is hereby made. It there appears that he suffered an aggregate loss of $ 32,079.54 upon such distribution.
*1389 Under date of January 8, 1941, Harriman Thirty caused to be filed a return of information under section 148 (d) of the Internal Revenue Code.
Harriman Thirty received from Harriman Fifteen the following amounts:
| 1931 | $ 141,892.80 |
| 1932 | |
| 1933 | 186,321.94 |
| 1934 | 38,580.00 |
| 1935 | 53,876.67 |
| 1936 | $ 67,141.85 |
| 1937 | 125,866.95 |
| 1938 | 39,720.91 |
| 1939 | 84,392.50 |
| 1940 | 447,509.88 |
The record discloses the following additional facts:
G. H. Walker*22 was the president of Harriman Fifteen from its organization to its dissolution. Harriman Fifteen was solely concerned with the liquidation of its assets. It liquidated such assets as rapidly as possible and paid the proceeds thereof to Harriman Thirty in fulfillment of its obligations to that corporation.
The bonds of the cities of Lake Worth and Wildwood had been in default some time prior to 1940. After long negotiations, the bonds were refinanced, and those bonds held by Harriman Thirty and subject to the terms of the contract of January 31, 1930, were sold as soon as possible thereafter. It was impossible to sell them prior to 1939 or 1940.
Russian Finance Construction Co. preferred stock was held by Harriman Thirty under the same agreement as the Lake Worth bonds. The investment represented a concession in Russian manganese production, a controversy concerning which had been settled by the repurchase thereof by the Russian Government. The payment of the principal of the Russian obligation was uncertain and the final settlement under the guaranty was not fully accomplished until 1940.
The officers of Harriman Thirty at all times intended to liquidate that corporation as *23 soon as practicable. The liquidation of Harriman Thirty was dependent on the fulfillment by Harriman Fifteen of its commitments to Harriman Thirty.
At the time of the formation of Harriman Thirty, Harriman, Inc., merged with Brown Brothers to form Brown Brothers Harriman Co., hereinafter called Brown-Harriman. Certain assets owned by Harriman, Inc., were not desired by Brown-Harriman. Their value was in dispute. In order to end the controversy, Harriman Thirty was formed and those assets were transferred to it so they could be "worked out" over a period of time.
At the time the partial liquidations of Harriman Thirty were accomplished in 1934, 1937, and 1939, no discussion concerning complete liquidation of Harriman Thirty was had. At no time prior to December *1390 16, 1940, was there a definite plan in existence for the complete liquidation of Harriman Thirty. The distribution upon the dissolution of Harriman Thirty in 1940 was not one of a series related to the partial liquidations distributed in 1934, 1937, and 1939.
The Commissioner determined that under the provisions of subdivisions (c) and (i) of section 115 of the Internal Revenue Code the petitioner realized a *24 short term capital gain on the distribution in liquidation made by the Harriman Thirty Corporation in 1940.
OPINION.
The respondent's position is that the issue before us is wholly one of fact and that, as a matter of fact, the distribution made by Harriman Thirty and received by the petitioner in 1940 was made in partial liquidation as one of a series of distributions in complete cancellation or redemption of a portion of its stock. He relies wholly on Estate of Henry E. Mills, 4 T.C. 820">4 T. C. 820.
The petitioner agrees that the issue is solely a factual one, but contends that, by the very terms of the agreement of January 31, 1930, between Harriman Fifteen and Harriman Thirty, it was impossible to consider, project, or formulate any plan of complete liquidation of Harriman Thirty until the agreement was fulfilled. He further asserts that the distributions made in 1934, 1937, and 1939 were wholly separate and independent actions and had no relation in intent or in import either to each other or to the final distribution in 1940.
The vital and decisive factor in the problem before us is found in the obligations of Harriman Fifteen to Harriman Thirty as contained*25 in the contract of January 31, 1930. The petitioner argues that the contractual burden imposed therein compelled Harriman Thirty to assume and maintain a position and policy wholly foreign to and inconsistent with the idea of complete liquidation, until Harriman Fifteen was relieved from its guaranty to insure the realization of $ 1,681,896.52 from certain assets of Harriman Thirty assigned to it by Harriman, Inc. The petitioner concedes, and the evidence shows, that the general intent and purpose of Harriman Thirty was to liquidate its assets as rapidly as possible and ultimately to accomplish a complete liquidation, but he contends that such a "floating intention" was by no means the equivalent of the "plan of liquidation" contemplated by the statute.
While the factual question is a close one, we think that the petitioner's argument is sound and that it is well supported by the facts of record. The respondent relies on the assumption that the 1940 distribution was one of a series of distributions in complete cancellation and redemption of all or a portion of Harriman Thirty's stock, as *1391 defined in the statute, 1 and thus limits himself to the theory that the 1940 distribution*26 was directly related to the distributions of 1934, 1937, and 1939 and that all such distributions were parts of an integrated plan of liquidation.
The facts show that, in the due and ordinary course of reducing Harriman Thirty's assets to cash, certain amounts were accumulated and, at intervals, distributions of portions of such accumulations were made to stockholders. However, the profits and fees and the accounts receivable guaranteed and the securities agreed to be purchased were outstanding and were not definitely ascertained in amount, nor was the guarantor released from its guaranty until 1940. When such release became a certainty, *27 then, and only then, could Harriman Thirty take steps to effect a complete liquidation. The plan of liquidation was created at that time and the distribution made to the petitioner in 1940 was made pursuant to that plan.
There is little suggestion, and certainly no proof, that the various actions taken by Harriman, Inc., Harriman Fifteen, Harriman Thirty, and Brown-Harriman were controlled by a single person or group of persons, or even by the same interests, and thus evidenced a scheme to defeat tax. The various phases of the liquidation show a proper business basis and cogent business reasons therefor.
Estate of Henry E. Mills, supra, relied upon by the respondent, turned largely on a failure of proof of error. We there held that the several distributions were made in accordance with an original plan formulated in 1930; that the distributions in 1938 were likewise so made; and that there was no "new plan, complete in itself and sufficient for the purpose of the statute." In describing the procedure there employed, we said:
Mills Oil Co. sold all of its business and business assets in 1930 and never thereafter engaged in that business or *28 any other. It began immediately to distribute to its stockholders the proceeds from the sale as they were received. It closed out its remaining accounts, and as fast as it obtained any funds it distributed them to its stockholders. It was known from the beginning that the purchase price from the sale of the business would be realized during a limited number of years. The corporation retired its preferred stock in 1930 and in that year began a series of distributions under which its remaining property, consisting principally of the proceeds of the sale, was distributed to the common stockholders promptly as realized. The resolutions authorizing these distributions describe them as liquidating distributions and the corporation indicated in other ways that it was in the process of liquidation and dissolution. It seems pretty obvious that, following the sale, a plan was formulated under which these distributions would be made. Apparently, a part of *1392 that plan was that when all of the payments had been received the corporation would not engage further in business, but would dissolve. No specific action on the subject of dissolution was taken until 1938, but that is not*29 to say that, until the resolution of December 31, 1938, the corporation had no plan of liquidation or that the liquidating distributions prior to that date were not of a series in complete cancellation or redemption of all of the stock in accordance with a bona fide plan of liquidation under which the transfer of the property under the liquidation was fully contemplated. To say the least, the evidence does not negative the existence of a prior plan of which the December 31, 1938, resolution was but a concluding part. * * *
The same question was again before the court in Williams Cochran, 4 T. C. 942. In that case, addressing ourselves to the same basic issue as we find in the instant case, we said:
At the time of the acquisition of the first 1,256 shares of preferred stock (that is, 256 shares acquired on May 8, 1939, 100 shares acquired on August 7, 1939, and 900 shares acquired on October 12, 1939), the Gremoco Corporation had the intention of acquiring all of the preferred stock owned by the petitioner and retiring it. The plan was to purchase shares of that stock in varying amounts under the option, and to pay for them out of the proceeds of sales*30 of Gremoco's marketable securities, which were to be made when higher prices could be realized for such securities, and to dissolve Gremoco after all of petitioner's preferred stock had been acquired in this manner. However, no specific date was set for dissolution. After Gremoco had operated under this plan, and after it had acquired the 900 shares of preferred stock on October 12, 1939, and before it acquired the 2,000 shares on November 10, 1939, the common stockholders believed that market prices for its securities had risen to the point where liquidation was justified and they then determined that Gremoco should be completely liquidated at once. Gremoco thereafter purchased the remaining 2,000 shares of petitioner's preferred stock on November 10, 1939, and a few days later, on November 20, 1939, its directors voted for immediate dissolution and the stockholders executed a certificate of consent.
* * * *
Although the stockholders of Gremoco planned to liquidate as soon as all of the preferred stock had been acquired, their plan, as it existed prior to the decision for immediate liquidation made in mid-October 1939, did not provide for completion of the liquidation within a*31 specified time. For this reason the amounts received by the petitioner for the 1,256 shares disposed of on May 8, August 7, and October 12, 1939, were not distributions in "complete liquidation" within the meaning of section 115 (c). The complete liquidation defined in that section requires that the distributions be made in accordance with a bona fide plan of liquidation under which the transfer of the property under the liquidation is to be completed within a time specified in the plan not exceeding the period fixed in the statute; and where, as here, specification of a time limit is made after the stock has been acquired, the plan can not be given retroactive effect to cover prior distributions, Amory L. Haskell, 46 B. T. A. 164, 174; affd., 133 Fed. (2d) 202, such as those mentioned in this paragraph.
The block of 2,000 shares of preferred stock was disposed of on November 10, 1939, after the stockholders of Gremoco had decided to liquidate the corporation at once. The decision to liquidate at once was made sometime between October 12 and October 22, 1939, the resolution to dissolve immediately was passed on November *32 20, 1939, pursuant to that decision, and the corporation *1393 was dissolved as of November 30, 1939. The distribution with respect to the 2,000 shares, therefore, was a distribution in complete liquidation within the meaning of section 115 (c).
The above is particularly apt in the present case. The events on which the distributions in 1940 were based all occurred in that year. As we have observed above, the plan to effect complete liquidation originated and was consummated within that year. It can not be given retroactive effect. Amory L. Haskell, 46 B. T. A. 164; affd., 133 Fed. (2d) 202; Williams Cochran, supra. No definite date was set for liquidation prior to the actions taken in the latter part of 1940. The resolution adopted December 16, 1940, decreed dissolution of the corporation and declared a liquidating dividend of all assets after payment of all corporate liabilities, payment to be made December 27, 1940, to stockholders of record on that date upon surrender of their stock. The distribution made to the petitioner in 1940 in conformity with such resolution was in complete*33 liquidation of his stock in Harriman Thirty and is taxable as a long term capital gain under section 115 (c), Internal Revenue Code. Cf. Rhode Island Hospital Trust Co., 7 T.C. 211">7 T. C. 211.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 115 [I.R.C.]. DISTRIBUTION BY CORPORATIONS.
* * * *
(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.↩