*723 1. Tax-free transaction whereby a corporation issued its stock to the shareholders of another corporation in exchange for their shares and simultaneously took over the bulk, and later the balance of that corporation's assets and liabilities, held, to result in the successor's acquisition and retention of the predecessor's earnings and profits.
2. In subsequent tax-free "split-off" reorganizations whereby successive corporations transferred portions of their assets to new companies in exchange for the latter's stock, simultaneously distributed tax-free to the transferor's stockholders, held, the earnings and profits of the transferor are considered as those of the transferee, in the proportion of net assets transferred to total net assets of the transferor.
*188 By these consolidated proceedings petitioners contest income tax deficiencies determined by respondent for the year 1932 as follows:
| Petitioner | Docket No. | Deficiency |
| Estate of Howard H. McClintic | 101197 | $73,087.46 |
| Charles D. Marshall | 101757 | 82,114.61 |
*724 Petitioner in Docket No. 101757 claims an overpayment in the amount of $479.03.
The single issue in each proceeding is whether distributions received during the tax year by petitioner's decedent in Docket No. 101197 and by petitioner in Docket No. 101757 constituted taxable dividends or returns of capital. Determination of this issue turns upon whether the distributor, Pitt Securities Corporation, had earnings or profits available for distribution as dividends during the tax year.
FINDINGS OF FACT.
The facts are stipulated and as so stipulated are hereby found.
Petitioners in Docket No. 101197 are the executors of Howard H. McClintic, deceased, who died testate on August 5, 1938, a resident of Pittsburgh, Pennsylvania. For convenience the decedent will be *189 referred to hereinafter as one of the petitioners. Petitioner in Docket No. 101757 is an individual residing in Pittsburgh, Pennsylvania. Petitioners filed their income tax returns for the year 1932 with the collector for the twenty-third district of Pennsylvania.
McClintic-Marshall Construction Co., hereinafter referred to as the Construction Co., was incorporated in 1900 under the laws of Pennsylvania*725 for the purpose of engaging in the business of fabricating and erecting structural steel. Its four stockholders were A. W. Mellon, R. B. Mellon, and the petitioners.
McClintic-Marshall Corporation, hereinafter referred to as McClintic-Marshall, was incorporated under the laws of Delaware on December 24, 1926. On December 29, 1926, it acquired all the outstanding capital stock of the Construction Co., by issuing therefor to the stockholders of the Construction Co. a like number of its own shares both common and preferred, in a nontaxable reorganization within the meaning of Revenue Act of 1926, section 203(b). The Construction Co. at that time owned all or a large part of the capital stock of several subsidiary corporations engaged, like itself, in the steel construction business; 500,000 of the 600,000 outstanding shares of stock of the Koppers Co., a Delaware corporation; stock of other corporations; and a miscellaneous lot of securities. It also owned and operated fabricating plants at Chicago, Illinois, and at Rankin, Leetsdale, and Pottstown, Pennsylvania.
On December 29, 1926, the Construction Co. had capital stock outstanding having a par value of $7,325,700, and according*726 to its books, a surplus of $14,662,568.92, made up as follows:
| Surplus at March 1, 1913 | $1,584,925.10 | |
| Undistributed earnings from March 1, 1913 to December 29, 1926 | 16,936,243.82 | |
| Undistributed earnings from organization to December 29, 1926 | 18,521,168.92 | |
| Less charges to surplus: | ||
| 100% stock dividend on common stock 1921 | $3,060,000 | |
| 100% stock dividend on preferred stock 1921 | 410,100 | |
| Stock dividend on common stock paid in preferred stock October 1922 | 388,500 | 3,858,600.00 |
| Surplus per books, December 29, 1926 | 14,662,568.92 |
On December 29, 1926, the fair market value of the stock of the Construction Co. was $65,211,263.78. The basis in the hands of McClintic-Marshall, computed under the Revenue Act of 1928, section 113, was $9,733,030.
On December 29, 1926, and as a part of the same reorganization, the Construction Co. made a distribution in kind to its sole stockholder, McClintic-Marshall, of the assets listed below, the table showing the values of the various assets at which they were carried on the Construction Co.'s books at the time of the distribution, the fair *190 market values thereof at that time, and the liabilities of the*727 Construction Co. attributable to such assets which McClintic-Marshall assumed in connection with the distribution:
| Assets | Book value | Fair market value | Liabilities assumed | Net fair market value |
| I. Fabricating business: | ||||
| 1. Chicago plants | $3,006,640.78 | $4,534,753.84 | $2,931,212.50 | $1,603,541.34 |
| 2. Leetsdale plant | 956,238.66 | 2,317,199.59 | 1,436,868.88 | 880,330.71 |
| 3. Stock of six fabricating subsidiaries | 4,335,383.38 | 15,353,448.18 | 10,000,607.37 | 5,352,840.81 |
| 4. Stock of Kenilworth Land Co | 650,000.00 | 296,690.94 | 296,690.94 | |
| II. Investments: | ||||
| 5. Stock of Koppers Co | 2,518,000.00 | 37,500,000.00 | 37,500,000.00 | |
| 6. Others | 1 21,219,923.36 | 12,045,781.39 | 5,750,501.25 | 6,295,280.14 |
| Total | 32,686,186.18 | 72,047,873.94 | 20,119,190.00 | 51,928,683.94 |
The assets and liabilities making up the distribution of December 29, 1926, were recorded on the books of McClintic-Marshall at the book values thereof theretofore carried on the Construction*728 Co.'s books. As a result of the distribution the Construction Co. retained only its fabricating plants at Rankin and Pottstown, Pennsylvania, and some Liberty bonds. The fair market value of its stock immediately after the distribution was $13,282,579.84, of which $12,866,596.20 was attributable to the net fair market value of the plants at Rankin and Pottstown and $415,983.64 was attributable to the Liberty bonds. According to its books after the distribution it had assets of $10,481,443.34, liabilities of $1,023,878.69, capital stock outstanding of $6,120,000 common and $1,205,700 preferred, and surplus reserves of $2,031,864.65.
In the months of October and December 1930 McClintic-Marshall received distributions in complete liquidation of nine of its wholly owned subsidiary corporations, namely, the Construction Co., the six fabricating companies the stock of which had been distributed to McClintic-Marshall by the Construction Co. on December 29, 1926, and two other companies the stock of which had been acquired by McClintic-Marshall between December 29, 1926, and October 1930. The stock of one of the two last mentioned companies was acquired by McClintic-Marshall immediately*729 after the distribution of December 29, 1926, in exchange for the plants and properties located in Chicago which McClintic-Marshall had received as part of the distribution from the Construction Co.; and that of the other was acquired by McClintic-Marshall for cash in the amount of $1,600,000. There was no added cost to McClintic-Marshall in connection with the stock of the six fabricating subsidiaries received in the distribution of December 29, 1926, except an amount of $300,000 that was paid in 1929 for the outstanding minority stock interest in one of these companies. Between December 29, 1926, and December 31, 1930, the Construction Co. had *191 retired all of its preferred stock and a portion of its common stock for cash in the amount of $2,325,700, leaving common stock outstanding with a par value of $5,000,000.
The book costs of the stock of the nine subsidiaries aggregated $14,995,952.50; the net book values of the assets received by McClintic-Marshall in liquidation aggregated $26,143,372.33; the fair market value of the assets of the nine subsidiaries at the times of the respective liquidations was $32,828,473.22; and a profit on the liquidation of the subsidiaries*730 was recorded on the books of McClintic-Marshall in the amount of $11,147,419.83. The basis of the stock of the nine subsidiaries in the hands of McClintic-Marshall, computed under the Revenue Act of 1928, section 113 (before taking into account the effect, if any, of the distribution of 1926), was $17,403,282.50.
From December 29, 1926, up to and including January 15, 1931, (but exclusive of the distribution of December 29, 1926, and without taking into account the liquidation of the nine subsidiaries or the transaction with the Union Construction Co. set forth in the next paragraph) McClintic-Marshall realized earnings and profits of $9,147,609.29 out of which it paid dividends of $3,859,043. On January 15, 1931, the net accumulated earnings and profits of McClintic-Marshall, according to its books, were $29,002,982.29, made up as follows:
| Distribution received from Construction Co. Dec. 29, 1926 | $12,566,996.17 |
| Profit on liquidation of subsidiaries | 11,147,419.83 |
| Earnings December 29, 1926 to January 15, 1931 | 9,147,609.29 |
| Total | 32,862,025.29 |
| Less dividends paid in cash | 3,859,043.00 |
| Earnings and profit per books | 29,002,982.29 |
Thereafter, on January 15, 1931, McClintic-Marshall*731 transferred a portion of its assets, including the stock of the Koppers Co., to the Union Construction Co., hereinafter referred to as Union (which had been organized in October 1930), for substantially all the shares of the latter's stock plus an assumption of certain liabilities. The Union stock was immediately distributed by McClintic-Marshall to its stockholders. This transaction was a nontaxable reorganization within the meaning of the Revenue Act of 1928, section 112.
The amount of liabilities assumed by Union was $1,201,313.33. The assets transferred to Union on January 15, 1931, had a net book value of $17,653,789.04 and a fair market value of $45,707,778.15. They consisted of cash and accounts receivable, worth their face amounts, in the aggregate of $1,471,916.51, the 500,000 shares of the Koppers Co. stock having a fair market value of $37,500,000, and other assets having a fair market value of $6,735,861.64. Other than the cash and accounts *192 receivable the transferred assets had been acquired by McClintic-Marshall either through the distribution of December 29, 1926, or thereafter for cash; and the aggregate of the fair market values on December 29, 1926, of*732 the transferred assets so acquired on that date, plus the actual cost of the assets acquired thereafter, being all the assets transferred to Union other than cash and accounts receivable, was $44,761,435.37. The assets and liabilities so transferred to Union were recorded on its books at the book values thereof theretofore carried on the books of McClintic-Marshall.
The assets of McClintic-Marshall which were not transferred to Union had a net book value on January 15, 1931, of $19,914,893.25, and a fair market value of $36,917,951.34. The liabilities attributable thereto and which were not assumed by Union amounted to $15,084,951.34, making a net fair market value of the retained assets of $21,833,000. These assets consisted of all the assets received in liquidation of the nine subsidiaries, the Leetsdale plant, the stock of the Kenilworth Land Co., and other assets costing $2,151,013.54. On February 10, 1931, McClintic-Marshall transferred all of these remaining assets to the Bethlehem Steel Corporation or its nominees for the consideration of 240,000 shares of common stock and $8,200,000 in face value of bonds of the Bethlehem Steel Corporation, plus an assumption of all*733 of McClintic-Marshall's liabilities in the amount of $15,084,951.34. McClintic-Marshall immediately distributed the stock and bonds so received to its stockholders in complete liquidation. In the final settlement of the income tax liability of petitioners and the other stockholders of McClintic-Marshall for the year 1931, $21,833,000 was correctly held to be the fair market value on February 10, 1931, of the stock and bonds so distributed to them and was treated as taxable under the Revenue Act of 1928, section 112(c)(1), and income tax at capital gain rates was duly paid thereon by the stockholders.
On May 9, 1931, Union transferred the 500,000 shares of stock of the Koppers Co. (a Delaware corporation) to the Koppers Co. (a Massachusetts voluntary association) solely in exchange for 2,500,000 shares of beneficial interest in the association, the remaining 500,000 shares of beneficial interest having been issued by the association immediately prior thereto in exchange for the remaining 100,000 outstanding shares of stock of the Koppers Co. (Delaware) held by others. Union immediately distributed to its stockholders the shares of beneficial interest so received. This transaction*734 was a nontaxable reorganization within the meaning of the Revenue Act of 1928, section 112. The shares of the Koppers Co. (Delaware) so transferred had a net book value of $2,518,000 and a fair market value of $35,000,000 on the date of transfer. After the transaction Union retained assets having a net book value of $15,735,483.05 and a fair market value of *193 $8,640,075.36 and its liabilities amounted to $1,169,937.33. These retained assets were among those acquired from McClintic-Marshall on January 15, 1931, as set forth above, and had a fair market value on that date of $8,207,778.15.
On June 1, 1931, Union transferred a portion of its assets to the Pitt Securities Corporation, hereinafter referred to as Pitt (which was organized in May 1931), for the consideration of shares of the latter's stock, plus an assumption of liabilities. The Pitt stock was immediately distributed by Union to its stockholders. This transfer was a nontaxable reorganization within the meaning of the Revenue Act of 1928, section 112. The assets so transferred to Pitt had a net book value of $12,651,413.68 and a fair market value of $5,496,404.55 on the date of transfer, consisting of cash*735 and accounts receivable, worth their face amounts, in the aggregate of $1,958,121.74, and other assets having a fair market value of $3,538,282.81 which were among those acquired by Union from McClintic-Marshall on January 15, 1931, as set forth above, and had a fair market value on that date of $3,566,310.80. The liabilities assumed by Pitt amounted to $691,675.74. The assets and liabilities so transferred to Pitt were recorded on its books at the book values thereof theretofore carried on the books of Union. The assets retained by Union had a net book value of $3,090,951.26 and a fair market value of $3,091,031.74, and its liabilities not assumed by Pitt amounted to $465,312.17. The retained assets were among those acquired fron McClintic-Marshall on January 15, 1931, and had a fair market value on that date of $3,170,156.41.
Without taking into effect the transactions with McClintic-Marshall, the Koppers Co., and Pitt, Union realized earnings and profits of $571,143.22 during the period from January 15 to May 9, 1931, out of which it paid dividends of $91,175.28, and from May 9 up to and including June 1, 1931, it realized earnings and profits of $10,683.51, out of which*736 it paid dividends of $3,801.26.
On or after June 5, 1931, and during that year, Union transferred all of its remaining assets, including some money, to its stockholders in complete liquidation. In the final settlement of the income tax liability of petitioners and the other stockholders of Union for the year 1931 the transfers to the Koppers Co. and to Pitt and the distribution in complete liquidation were treated as having been made pursuant to a single plan of reorganization and liquidation of Union. In the settlement the remaining assets of Union were correctly valued at $2,645,120.19 and treated as "other property or money" received pursuant to the reorganization and liquidation and taxable under the Revenue Act of 1928, section 112(c)(1), and income tax at capital gain rates was duly paid thereon by the stockholders.
*194 Prior to June 1, 1931, Pitt had no earnings or profits. From June 1 to December 31, 1931, without taking into account distributions to its stockholders or the transaction with Union, Pitt sustained a loss in the amount of $220,927.48. During the same period it made distributions tributions to its stockholders by means of payments for their account*737 in the aggregate amount of $467,584.66, which amount was treated as a dividend received by the stockholders in the final settlement of their income tax liability for the year 1931, and upon which income tax was duly paid by them.
Pitt's balance sheet on December 31, 1931, disclosed assets of $12,433,631.16, liabilities of $3,144.96, capital stock of $5,000, and surplus of $12,425,486.20. During the year 1932 Pitt realized earnings and profits in the amount of $181,920.12, accruing ratably during the year.
At all times during the year 1932 each petitioner was the owner of 10 shares of stock of Pitt out of a total of 50 shares outstanding with a par value of $100 per share, which, by reason of the transactions already described, had been held by petitioners for more than two years within the meaning of the Revenue Act of 1932, section 101(c)(8)(C). During the year 1932 Pitt distributed to its stockholders cash in amounts aggregating $1,100,000, and accordingly it distributed to petitioners $55,000 each on each of the following dates in 1932: March 7, June 13, September 14, and December 15, the aggregate amount distributed to each petitioner being $220,000. No formal corporate*738 action was taken by Pitt with respect to these distributions except the adoption of a resolution at a meeting of its board of directors held on March 2, 1933, approving the distributions and authorizing its treasurer to notify the stockholders that the distributions had not been made from earnings or profits, since "the corporation had never had earnings or profits on hand."
In their returns for the year 1932 each petitioner reported the entire amount of distributions to him as a return of capital and reported a capital gain of $78,605.50, being the excess of the distribution of $220,000 over the amount of $141,394.50 shown by them in their respective returns as the basis of their stock in Pitt, stated to have been acquired in 1900. The correct basis to be used for determining gain or loss upon sale or disposition of such stock is $209,805.50 in the case of decedent McClintic and $205,973.82 in the case of petitioner Marshall.
In the notices of deficiency respondent determined that the distributions of $220,000 received by each petitioner were taxable as dividends in their entirety, and he therefore eliminated the amount which each had previously treated as capital gain.
*739 The Construction Co., McClintic-Marshall, Union, and Pitt kept their books of account and filed their returns on the accrual basis, *195 which basis was supplemented in the case of the Construction Co. and McClintic-Marshall by the completed contract method with respect to construction contracts. In the case of each of the assets, except the stock of McClintic-Marshall, at any time owned by any of the four corporations, the basis prescribed in the Revenue Act of 1932, section 113, and corresponding sections of earlier revenue acts was the same as the book value thereof as set forth in these findings. For the period from December 29, 1926, to December 31, 1930, inclusive, the Construction Co. and McClintic-Marshall were affiliated with each other and filed consolidated returns for themselves and corporations affiliated with them. Neither the distribution of December 29, 1926, nor the liquidating distributions of 1930 were reflected in taxable income as returned or as finally determined by the Commissioner.
Petitioner Marshall in his return for the year 1932 reported an income tax liability of $7,669.45, which he paid in four equal installments on March 20, June 15, September*740 15, and December 15, 1933. On March 15, 1935, he filed a claim for refund, alleging as a ground therefor the realization of a loss of $6,405 upon the worthlessness of certain stock, which loss was allowed by respondent in the notice of deficiency.
The notices of deficiency were mailed to petitioners on December 19, 1939, and the petitions were filed on January 16, 1940, in Docket No. 101197 (decedent McClintic) and on March 13, 1940, in Docket No. 101757 (petitioner Marshall).
During the taxable year 1932 the Pitt Securities Corporation had earnings and profits available for distribution as taxable dividends in the amount of not less than $1,100,000, computed as follows:
| Undistributed earnings since Mar. 1, 1913, of Construction Co. acquired by McClintic-Marshall | $16,936,243.82 |
| Undistributed operating earnings of McClintic-Marshall from 1926 to January 15, 1931 | 5,288,566.29 |
| Undistributed earnings of McClintic-Marshall on January 15, 1931, not less than | 22,224,810.11 |
| Earnings of McClintic-Marshall apportioned to Union (at the ratio, 67.09%, of net assets transferred, to total net assets) | 14,910,625.10 |
| Less Union's loss on Koppers transaction | 2,500,000.00 |
*741 This leaves a figure of over $12,000,000 for the accumulated undistributed earnings of Union, obviously more than adequate so that if apportioned to Pitt (at the ratio, 64.66 percent, of net assets transferred to total net assets), Pitt's earnings, although reduced by its net operating loss of $39,007.36 and its distributions of $467,584.66, were in excess of $1,100,000 during all of 1932.
*196 OPINION.
OPPER: We take as our point of departure the principle of the Sansome case 1 that accumulated earnings and profits of a predecessor corporation are made available for dividend distribution by a successor where its acquisition of the corporate assets is the result of a tax-free reorganization. Respondent relies upon the figures carried on the books of the various corporations involved in the series of transfers which led ultimately to the distribution which raises the present questions; and, tracing through the surplus accounts, which in the main conformed with the tax treatment of the various transactions and culminated in a $12,000,000 book surplus in Pitt Securities, the corporation making the distribution in dispute, concludes that there was ample reserve of*742 earnings and profits to cover the dividend.
If respondent's treatment is correct that is a short and simple formula for disposing of the present proceedings. Petitioners, however, assert that net taxable income and actual earnings and profits available for dividends are two different concepts, and that "Book entries are by no means conclusive and must yield to the actual facts, which in this case are not in dispute." For purposes of discussion we shall adopt this general approach and from that viewpoint examine the transactions which led to the distributions in controversy.
This should begin with the corporation to which we are referring as the Construction Co. and the tax-free reorganization by which McClintic-Marshall acquired that company's stock and simultaneously received a distribution of the bulk of its assets. In December 1926, when this reorganization took place, the Construction Co. had net assets of a value of approximately $65,000,000, 2 though its capital was slightly less than $7,500,000. *743 According to its books it had earnings accumulated during its corporate life of $18,500,000, of which, however, some $1,500,000 had accumulated prior to March 1, 1913, and nearly $4,000,000 represented charges to surplus on the issuance of stock dividends in prior years. The post-1913 accumulations are thus approximately $17,000,000. The impounding of surplus in stock dividends which were apparently nontaxable would not diminish this figure, , which is, therefore, what we must regard as the accumulated earnings of the Construction Co. available for the declaration of taxable dividends at that time.
The cost of the Construction Co. shares to McClintic-Marshall is asserted 3 to be $65,000,000, that being the value of the Construction *197 Co. assets, and hence of the Construction shares for which the McClintic-Marshall stock was issued. But we can not overlook the simultaneous transfer to McClintic-Marshall of most of the Construction Co. assets, which is stipulated to have been part of the reorganization.
*744 A fundamental principle in the consideration of reorganization problems is that the successive parts of the reorganization should be viewed as a whole. ; ; ; certiorari denied, ; . When this is done, McClintic-Marshall is seen to have received some $52,000,000 of miscellaneous assets of the Construction Co., including the stock of six subsidiary companies having a value of $15,000,000. That this $52,000,000 is denominated a "distribution" is of no consequence since the assets concerned were acquired as part of the reorganization, as the parties have stipulated, and were part of what McClintic-Marshall, on petitioners' theory, received for its payment of $65,000,000. As we have already noted, the $65,000,000 is petitioners' figure for the cost of everything that McClintic-Marshall got because the stock which it issued, having no other indication of market value, should*745 be valued according to the petitioners by viewing the stipulated contemporary worth of the assets received for the stock. We can not escape the conclusion, therefore, that $52,000,000 of the stock was paid out and $52,000,000 of miscellaneous assets were received when the transaction as a whole is considered.
Following the theory presented to its logical conclusion, the cost of the miscellaneous assets was $52,000,000 out of the total of $65,000,000 which McClintic-Marshall paid. This, of course, leaves $13,000,000 unaccounted for. But when the entire transaction was concluded McClintic-Marshall held, in addition to the miscellaneous assets, the stock of the Construction Co., which in turn still owned property which the parties have stipulated was worth approximately $13,000,000. By a similar process of reasoning we conclude, therefore, that the remaining $13,000,000 was paid by McClintic-Marshall for the Construction Co. stock. There is thus established a true cost basis for purposes of the computation in which we are now engaged of $13,000,000 and no more 4 for the Construction Co. stock.
*746 This brings us to the occurrence which, in petitioner's view, is the nub of their whole contention. "The most important of the several transactions affecting the earnings of McClintic-Marshall Corporation," they say in their brief, "and on which the outcome of these cases ultimately turns, is the complete liquidation in 1930 of nine of *198 its wholly-owned subsidiary corporations." The point made is that these liquidations, including the six subsidiaries and the Construction Co., resulted in a loss to McClintic-Marshall computed by petitioners at a figure sufficient to eliminate the earned surplus which the Construction Co. carried on its books at the time of the transfer to McClintic-Marshall.
The computations upon which petitioners rest that assertion need not be reproduced in detail. Suffice it to say that they include as the predominant item of unrecovered cost an amount of $29,500,000 or thereabouts attributed to the stock of the Construction Co., a figure which is arrived at by assuming that of the $65,000,000 paid for it only about $34,000,000 was recovered by the receipt of Construction Co. assets in 1926. This assumption in turn, proceeds on the theory that*747 the transfer of these assets was a dividend to the full extent of the Construction Co.'s earnings, and that it wiped these out and at the same time reduced McClintic-Marshall's recovery of its cost by a corresponding figure.
Without this premise the claim of a loss on the liquidation falls. Since, as we have seen, there is no justification for the basic assumption that the cost of the Construction Co. stock was more than the approximate $13,000,000 shown by the net result of the 1926 reorganization, all of its cost and that of the other subsidiaries was recovered by the stipulated value of the assets received in the 1930 liquidation and no loss but in fact a slight profit resulted. It follows that there is no ground for the contention that McClintic-Marshall's earned surplus was wiped out or even impaired when its subsidiaries liquidated.
It by no means weakens the force of what we have already concluded to add that the facts demonstrate how unreal and theoretical is any contention that McClintic-Marshall as a result of the transactions described was any worse off than it had been in the first place. Disregarding theories and technical provisions of the tax law, as we must*748 to accord with petitioners' approach, we see that McClintic-Marshall appears to have acquired all of the stock of the Construction Co., and after becoming the owner of the stock, has effected a complete liquidation of Construction Co. by eventually transferring all of the assets of Construction Co. to itself. It thus received a total of $65,000,000 worth of net assets. Obviously, it has had no loss. It got exactly what it set out to get and has paid for it in its own stock, which stock, at best, was not worth more than $65,000,000. $65,000,000 paid out and $65,000,000 received back results in neither gain nor loss. Thus, actually, McClintic-Marshall had no loss whatsoever upon the acquisition of the assets of the Construction Co. nor upon its liquidation.
*199 What is perhaps a collateral or supplementary consideration is that basically the situation is not to be distinguished from that adjudicated in various aspects by the Sansome case and those applying a similar principle. ; *749 ; ; ; certiorari denied, ; , affirming ; ; certiorari denied, ; ; . Cf. ; certiorari denied, ; .
* * * These cases hold that, where there has been a reorganization in which the stockholders of an old company have received stock in the new corporation in exchange for their stock in the old, and where under the Revenue Act of 1921 the transaction was tax-free, the earnings of the old corporation continue to be earnings in the hands*750 of the new, the distribution of which constitutes a taxable dividend. * * * [].
And it is unnecessary to attempt to determine whether here the successor achieved the predecessor's earned surplus when the latter's stock was acquired, on the one hand, or when its assets were completely transferred, on the other. For at least upon the liquidation of the subsidiaries McClintic-Marshall received a full distribution of all of the assets originally held by the Construction Co. Cf. ;
Petitioners, in effect, are seeking to avoid the Sansome result by reliance on a procedure involving the asserted declaration of a dividend to wipe out accumulated gains and profits which in the absence of such a "distribution" would have been available for dividend purposes to the predecessor corporation before the reorganization and to the successor afterward. But there is nothing to show that, when the Construction Co. transferred assets to McClintic-Marshall, this was a dividend. True, the provisions of section 115 of the Revenue Act of 1928, that any distribution*751 is presumed to be out of earnings and profits, would lend the argument weight in other connections. But the trouble with this assertion here is that it is in violation of the fundamental principle advanced by petitioners that provisions of the revenue act are immaterial in the computation of accumulated earnings available for the distribution of dividends. And, in any event, we are not prepared to grant that the underlying principle responsible for the conclusion reached in Commissioner v. Sansome can be so readily and narrowly restricted.
*200 After the liquidation of the subsidiaries, McClintic-Marshall transferred a part of its assets to the corporation we are calling Union and the remainder, after a brief interval, to the Bethlehem Steel Corporation in exchange for some of its stock and other considerations. This was distributed and McClintic-Marshall liquidated. Among the assets which Union thus acquired was stock in a corporation named "The Koppers Company," subsequently exchanged by Union for a proportionate part of the shares of an association of the same name. Soon after, Union transferred a part of its assets to Pitt Securities, distributing the latter's*752 stock received in exchange to its stockholders in liquidation. In the following year Pitt Securities made the disputed distribution to these petitioners, which was a dividend if, as respondent contends, there were earnings, and profits available to cover it. The part of McClintic-Marshall's assets transferred to Union was approximately 67 percent of the whole; the Koppers Co. stock represented roughly 82 1/2 percent of all of Union's assets; and the assets Union transferred to Pitt Securities were approximately 65 percent of its entire property.
While accepting the doctrine of the Sansome case when applied to a complete transfer which leaves the predecessor corporation without assets, petitioners resist its application if the transferor retains property which is sufficient to cover the amount of its undistributed earnings. In this case they say it should be concluded that the old corporation has retained its earnings and profits and that consequently none are available for distribution by the transferee. Thus it is contended that in the transfer to Union that company received no part of McClintic-Marshall's accumulated earnings and could not pass them on to Pitt Securities, *753 its successor. Without the earnings so inherited the operations of Union and Pitt Securities produced insufficient earned surplus to cover the disputed distributions.
There is, however, a reason for rejecting the argument, which we must consider, if not as such, then as the principle by which the accumulations are to be attributed to the respective corporations. An asset does not ordinarily partake of a character permitting its classification as between capital on the one hand and surplus on the other, and it is not the practice to maintain books of account or balance sheets in such a way that a division of this nature can be made by inspection of the asset or of its accounting treatment. See . For all that will generally appear, and the present proceeding is no exception, the capital assets as a whole will incorporate the combined attributes of stated capital and paid-in or accumulated surplus. In the absence of other means of allocation it is difficult to avoid treating each asset similarly so that it will be considered as including its proportionate share of the over-all division between capital and surplus. *754 Thus, if there is *201 a transfer to two new corporations and it is necessary to ascertain the amount of accumulated earnings available to each, the principle of proportionate allocation is applicable. , and , affirming memorandum opinions of this Board. The same reasoning would justify a similar allocation between capital and surplus when assets are partly retained and partly transferred from one corporation to another in a tax-free reorganization.
On the other hand, if a transferor corporation retains anything, the assumption could well be made that it would first assure its capital and that if it is to be presumed that anything is retained as between capital and surplus it would be the former. Petitioners say "The argument made in the Sansome line of cases, that transfer of earnings by reorganization is necessary to prevent escape from taxation, is, as we have shown, not applicable to split-off reorganizations such as those here involved." Our doubt as to the correctness of this claim can be briefly illustrated. *755 Suppose a corporation desires to get accumulated earnings into the hands of its stockholders without subjecting them to the tax on dividends. If petitioners are correct all that would be required would be for the old corporation to transfer assets to a new one, equivalent to the amount of the proposed distribution, and distribute to its shareholders the new company's stock, which would be both tax-free, section 112, and expressly precluded from affecting the subsequent distribution of earnings. 5 If the principle of the Sansome case does not govern, as petitioners urge, because the old corporation has transferred only a part of its assets, then the argument of the taxpayer in the Sansome case, which was rejected there, would now become valid with the result that a distribution by the new corporation would be considered a payment from its capital and hence not a taxable dividend. And this process could be repeated as many times as the old corporation desired to organize a new company to acquire its most recently accumulated earnings instead of declaring any dividends itself, at least until the shareholders had thereby recovered the cost of their shares.
*756 Thus, except for the doctrine of the Sansome case that assets which do not remain in the old corporation will be considered to have endowed the successor with earnings and profits to the extent of those of the predecessor, a tax avoidance identical in kind if not in degree with that condemned in the Sansome case could be made possible by "split-off" reorganizations. This reasoning might require *202 that in the case of such a reorganization the theory of the Sansome case should be employed so far as to consider that all accumulated earnings have been transferred to the successor corporation if the assets transferred are equal in value to the amount of accumulated earnings, should that be necessary to give effect to the statutory purpose.
But, as we have seen, there is justification for holding merely that under such circumstances an allocation of accumulated earnings should be made as between assets retained and those transferred; so that the accumulated earnings acquired by the new corporation will be that proportion of the total accumulations which the assets acquired are of the total assets; and for our purposes it will be sufficient if this method of allocation*757 is used in dealing with the transfers through which the assets passed from McClintic-Marshall to Union and from Union to Pitt Securities, the corporation responsible for the distribution to these petitioners which raises the instant questions. We are convinced that the Sansome principle governs at least to that extent. 6
*758 One further point requires discussion. It is suggested that at least the same principle of allocation of earnings must be applied to Union in its exchange of Koppers Co. stock for that of the Koppers Association and that if this is done the bulk of Union's earnings were transferred to the association and did not remain available for subsequent transfer in the reorganization between Union and Pitt Securities. But we think the Koppers transaction was of a different kind from the other reorganizations being considered, and that none of Union's earnings were thereby transferred.
The Sansome decision is predicated on the thought that a tax-free exchange does not operate to "break the continuity of the corporate life," and that therefore when a reorganization "does not toll the company's life as continued venture" the earnings of the "original, or subsidiary, company remain * * * 'earnings or profits' of the successor, or parent." This is because such reorganizations do not *203 "result in any 'gain or loss' to the shareholder participating in them."
Thus when the shareholders in McClintic-Marshall received stock of Union in lieu of a portion of what their McClintic-Marshall*759 stock had theretofore represented there was a continuity of the corporate life of the McClintic-Marshall-Union corporate enterprise. Union carried on a part of the business theretofore carried on by McClintic-Marshall and with a portion of its assets, and no gain or loss was recognized when the stockholders' investment in such assets and business, formerly represented by their stock in McClintic-Marshall, was exchanged for Union's shares. The continuity, however, was between the two corporate businesses, and the transfer of earnings under the Sansome principle affected them. It did not involve the shareholders, and it would be anomalous to say that any of the shareholders' earnings were taken over and became part of the old enterprise in its new form.
On the other hand, when Union, as a stockholder in the Koppers Co., exchanged that stock for shares of the new Koppers Association, the continuity of corporate life with which an application of the Sansome principle would be concerned was that between the two Koppers companies. The earnings of the old would remain such in the hands of the new. But there was no continuity of corporate life as between Union and the new Koppers*760 Association. The latter, we must assume, carried on the corporate business of the old Koppers Co., not that of Union.
Hence, the only result of the Koppers exchange material here is that possibly Union's earnings, which were in the neighborhood of $15,000,000 before the transfer, were decreased by $2,500,000 because the new Koppers shares were worth only $35,000,000, whereas Union's basis for the shares given up in exchange was $37,500,000. The earnings which, under the Sansome doctrine, would find their way to the new Koppers association, would be those of its predecessor, the old Koppers company, whose corporate life it continued. They were not those of the predecessor's stockholder, Union, which continued to hold its own earned surplus unimpaired, any more than they would have been had Union been an individual instead of a corporation.
The conclusions we have reached make it unnecessary to consider any other issues. We have taken the view that, mainly by total or proportionate acquisition through nontaxable reorganizations from antecedent companies, Pitt Securities had on hand prior to the distribution to these petitioners earnings and profits of its own or of predecessor*761 corporations which were available to it to cover the entire dividend then paid. This will still be true if all the other matters in controversy are decided in petitioners' favor. The computation upon which this statement rests appears at the conclusion *204 of our findings of fact and need not be repeated. The result is that respondent's action in charging these petitioners with the receipt of a dividend to the full extent of the amounts received from Pitt Securities was correct and should be sustained.
Reviewed by the Board.
Decision will be entered for the respondent.
Footnotes
1. This figure consists of other assets connected with the fabricating business having a book value of $3,494,292.25 and other assets connected with investments having a book value of $17,725,631.11. ↩
1. ; certiorari denied, . ↩
2. The figures throughout the opinion are approximate. They appear exactly in the findings. ↩
3. An inconsistency, of course, with the tax treatment which provides that the transferee's basis is that of the transferor. Revenue Act of 1928, sec. 113. This is also a result stipulated by the parties. ↩
4. The unrecovered cost as of 1930 of the Construction Co. stock must be further reduced, as petitioners concede, by $2,325,700, representing the interim retirement for cash in that amount of a corresponding block of the Construction Co. stock. ↩
5. SEC. 112. RECOGNITION OF GAIN OR LOSS [Revenue Act of 1928].
* * *
(h) Same - Effect on future distributions.↩ - The distribution, in pursuance of a plan of reorganization, by or on behalf of a corporation a party to the reorganization, of its stock or securities or stock or securities in a corporation a party to the reorganization, shall not be considered a distribution of earnings or profits within the meaning of section 115(b) for the purpose of determining the taxability of subsequent distributions by the corporation.
6. It is evident that on either theory the provisions of 112(h) (see footnote 5, supra) would be necessary to avoid an argument by the stockholders that the new stock, even though tax-free under section 112, represented a distribution of the old earnings and profits, however allocated between the corporations, with a corresponding reduction of earned surplus available for future distribution. See Treasury Department statement prepared for use by Senate Finance Committee March 6, 1924, Seidman "Legislative History of Federal Income Tax Laws," p. 696. The precautionary formula invoked by section 112(h) would prevent this method of tax avoidance in the case of a split-off reorganization through distributions of the earnings allocated to either the old or the new corporation. The section makes no attempt to deal with the division of earnings as between transferor and transferee and this may well be the explanation of the use of the ambiguous "the corporation" as the last two words of the section. See clarifying amendment to the cognate section of the 1936 Act, section 115(h); Senate Report, 74th Cong., 2d sess., No. 2156, p. 19. See Senate Report, 75th Cong., 3d sess., No. 1567, p. 18, which states in part: "Consequently, such earnings or profits remain unimpaired out of which taxable dividends may subsequently be declared * * * by another corporation which * * * takes in whole or in part the transferor's basis, so that the earnings or profits of the transferor corporation become in whole or in part the earnings or profits of such other corporation." ↩